UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of
1934 [Fee Required]
For the fiscal year ended December 31, 1994 Commission File Number 0-13030
Trans Financial Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Kentucky 61-1048868
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
500 East Main Street, Bowling Green, Kentucky 42101
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (502)781-5000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value per share
(Title of Class)
Preferred Stock Purchase Rights
(Title of Class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. _
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _
The aggregate market value of the voting stock held by nonaffiliates of the
registrant on March 1, 1995: $132,974,000.
The number of shares outstanding of the issuer's class of common stock on March
15, 1995: 11,212,977 shares.
Document Incorporated By Reference
Portions of the registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on April 24, 1995 are incorporated by reference into
Part III of this report.
The Exhibit Index is on page 52. This filing contains 56 pages (including this
facing sheet).
<PAGE>
Table of Contents
Item Page
Part I
1. Business 3
2. Properties 6
3. Legal Proceedings 6
4. Submission of Matters to a Vote of Security Holders 6
4a. Executive Officers of the Registrant 7
Part II
5. Market for the Registrant's Common Stock and Related
Shareholder Matters 8
6. Selected Financial Data 8
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
8. Financial Statements and Supplementary Data 8
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 8
Part III
10. Directors and Executive Officers of the Registrant 9
11. Executive Compensation 9
12. Security Ownership of Certain Beneficial Owners and
Management 9
13. Certain Relationships and Related Transactions 9
Part IV
14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 9
Signatures 11
<PAGE>
Part I
Item 1. Business
The Company and the Banks
Incorporated in 1981,Trans Financial Bancorp, Inc. ("the company") is a bank
and savings and loan holding company registered under the Bank Holding Company
Act of 1956 and the Home Owners' Loan Act, which has four commercial bank
subsidiaries:
Trans Financial Bank, National Association, headquartered in Bowling Green,
Kentucky ("TFB-KY"),
Trans Financial Bank, headquartered in Pikeville, Kentucky ("TFB-Pikeville"),
Trans Financial Bank Tennessee, National Association, headquartered in
Cookeville, Tennessee ("TFB-TN, NA"), and
Trans Financial Bank of Martin, National Association, headquartered in Martin,
Kentucky, ("TFB-Martin")
and two thrift subsidiaries:
Trans Financial Bank, Federal Savings Bank, headquartered in Russellville,
Kentucky, ("TFB, FSB") and
Trans Financial Bank of Tennessee, F.S.B., headquartered in Tullahoma,
Tennessee, ("TFB-TN, FSB").
Collectively, these six institutions are referred to in this report as "the
banks".
On December 31, 1994, the company had total consolidated assets of $1.618
billion, total loans of $1.144 billion, total deposits of $1.336 billion and
shareholders' equity of $111.6 million.
The company acquired its first thrift subsidiary, TFB, FSB, in November
1990. Effective January 1, 1991, the company's
two former bank subsidiaries were consolidated into one national banking
institution, TFB-KY. On August 30, 1991, as the result of a joint bid with PNC
Bank for certain deposits and assets of Future Federal Savings Bank, Louisville,
Kentucky, under the Accelerated Resolution Program of the Resolution Trust
Corporation, TFB-KY assumed approximately $75.9 million in deposits and acquired
approximately $11 million in consumer loans and received approximately $64.3
million in cash (net of a $1.0 million premium), all related to the Glasgow,
Kentucky and Tompkinsville, Kentucky branches of Future Federal Savings Bank.
Effective March 26, 1992, the company acquired First Federal Savings Bank of
Tennessee, Tullahoma, Tennessee, and effective March 27, 1992, the company
acquired Maury Federal Savings Bank, Columbia, Tennessee. These two Tennessee
thrift institutions were merged on November 27, 1992, to form TFB-TN,FSB. On
August 7, 1992, the company acquired (through First Federal Savings Bank of
Tennessee) the deposits and branch operations of five middle Tennessee branches
of Heritage Federal Bank for Savings, a Tennessee-based savings bank. In this
transaction, the company's Tullahoma-based affiliate assumed approximately $55
million in deposits, acquired approximately $2.3 million in premises and
equipment and received approximately $52 million in cash (net of a premium). On
December 31, 1992, the company merged with Dawson Springs Bancorp, Inc., the
holding company for Kentucky State Bank, Scottsville, Kentucky, and Commercial
Bank of Dawson Springs, Dawson Springs, Kentucky. These banks were merged into
TFB-KY on December 31, 1992. On July 6, 1993, in a transaction accounted for as
a purchase, the company acquired Trans Kentucky Bancorp, Pikeville, Kentucky,
the holding company for The Citizens Bank of Pikeville. At the acquisition date,
TFB-Pikeville (the former Citizens Bank of Pikeville) had total assets of $188.7
million, net loans of $107.6 million and total deposits of $163.9 million. The
aggregate cost, including consideration and acquisition costs, totaled $18.8
million. On February 1, 1995 TFB-Pikeville was converted to a national bank and
its name was changed to Trans Financial Bank of Pikeville, National Association.
On February 15, 1994, the company merged with Kentucky Community Bancorp.
Inc. ("KCB") of Maysville, Kentucky, the holding company for The State National
Bank, Peoples First Bank, and Farmers Liberty Bank, with combined assets of
approximately $175 million. Under the terms of the merger the shares of KCB
common stock outstanding were converted into 1,374,962 shares of common stock of
the company. These three banks were consolidated into the operations of TFB-KY
on March 31, 1994.
On April 22, 1994, the company merged with Peoples Financial Services, Inc.
("PFS") of Cookeville, Tennessee, the holding company for Peoples Bank and Trust
of the Cumberlands ("Peoples Bank") and Citizens Federal Savings Bank
("Citizens"), with combined assets of approximately $120 million. Under the
terms of the merger the shares of PFS common stock outstanding were converted
into 1,302,254 shares of common stock of the company. Peoples Bank became TFB-
TN, NA and Citizens was consolidated into the operations of TFB-TN, FSB on July
31, 1994.
On August 31, 1994, the company merged with FGC Holding Company ("FGC") of
Martin, Kentucky, the holding company for First Guaranty National Bank, with
approximately $125 million in assets. Under the terms of the merger, the shares
of FGC common stock outstanding were converted into 1,050,000 shares of common
stock of the company and the shares of FGC preferred stock were retired. First
Guaranty became TFB-Martin on September 30, 1994.
The transactions described in the preceding three paragraphs have been
accounted for using the pooling of interests method of accounting and,
accordingly, all financial data has been restated as if the entities were
combined for all periods presented.
In January 1994, Trans Travel, Inc, a full-service travel agency, was
introduced. Trans Financial Investment Services, Inc. , a full-service
securities broker-dealer, began operations in August 1994. Then, in the fourth
quarter of 1994, Trans Financial Mortgage Company, a mortgage banking company,
was formed. All mortgage banking activities of TFB-TN, FSB are expected to be
transferred to Trans Financial Mortgage Company in the second quarter of 1995.
Interest on domestic, commercial and mortgage loans constitutes the largest
contribution to the operating revenues of the banks. TFB-KY, TFB-Pikeville, TFB-
TN, NA, and TFB-Martin provide a full range of corporate and retail banking
services, including the acceptance of deposits for checking, savings and time
deposit accounts; making of secured and unsecured loans to corporations,
individuals and others; issuance of letters of credit; rental of safe deposit
boxes; and financial counseling for individuals and institutions. In addition,
TFB-KY is an equity partner in Quest, a partnership of several Kentucky banks
engaged in the development and operation of a regional automated teller machine
network.
TFB-KY and TFB-Pikeville provide a wide variety of personal and corporate
trust and trust-related services, including serving as executor of estates; as
trustee under testamentary and inter vivos trusts; as guardian of the estates of
minors and incompetents; as escrow agent under various agreements; and as
financial advisor to and custodian for individuals, corporations and others.
Corporate trust services include serving as registrar and transfer agent for
corporate securities and as corporate trustee under corporate trust indentures.
At December 31, 1994, approximately $436 million in assets were managed by the
trust department of TFB-KY.
Historically, the principal business of TFB, FSB and TFB-TN, FSB has been the
acceptance of savings deposits from the general public and the origination and
purchase of mortgage loans for the purpose of constructing, financing or
refinancing one- to four-family dwellings. Since its acquisition of TFB, FSB in
November 1990 and TFB-TN, FSB in March 1992, the company has introduced a
variety of additional products and services designed to attract a more diverse
customer base, including checking accounts, consumer, installment and commercial
loans, trust and brokerage services.
Trans Financial Investment Services, Inc. offers a wide range of investment
products and services, including financial planning, mutual funds, annuities,
and individual stocks and bonds to customers of the banks and others. Trans
Travel offers travel services to customers of the banks and others. Customers
can make travel arrangements by visiting a bank branch office or by using a
tollfree 800 number. In addition to taking care of travel arrangements for
individual and corporate customers, Trans Travel is packaging its own domestic
and international tours.
TFB-KY has eighteen offices; six located in Bowling Green, Kentucky, two
located in Glasgow, Kentucky, two located in Scottsville, Kentucky, two located
in Morehead, Kentucky, two located in Maysville, Kentucky, and one located in
each of Augusta, Cave City, Dawson Springs, and Tompkinsville in Kentucky. TFB-
KY also has a loan production office in Elizabethtown, Kentucky. TFB-Pikeville
has seven offices; three located in Pikeville, Kentucky, and one each in Elkhorn
City, Meta, Belfry and Virgie, Kentucky. TFB, FSB has two offices; one located
in Russellville, Kentucky, and one in Auburn, Kentucky. TFB-TN, FSB has nine
branch locations; two in Columbia, Tennessee, and one each in the Tennessee
communities of Tullahoma, Mt. Pleasant, Manchester, Rockwood, Kingston,
Shelbyville, and Winchester. In addition to its full service branches, TFB-TN,
FSB has a mortgage operations center in Tullahoma and loan production offices in
Nashville, Chattanooga, Knoxville, and Jackson. TFB-TN, NA has nine offices;
two located in Cookeville, Tennessee, and one located in each of Clarksville,
Crossville, Franklin, Lebanon, McMinnville, Murfreesboro, and Sparta. TFB-
Martin has two offices; one located in Martin, Kentucky, and one located in
Prestonsburg, Kentucky.
Competition
The deregulation of the banking industry and the enactment in Kentucky and
other states of legislation permitting multi-bank holding companies as well as
interstate banking has created a highly competitive environment for banking in
the company's market area.
As of June 30, 1994 (the latest date for which competitive information is
available), TFB-KY is the largest financial institution in the Bowling Green
area with 33% of bank deposits and 29% of total deposits for all financial
institutions. TFB-KY is also the largest financial institution in Glasgow/Cave
City with 46% of bank deposits and 38% of total deposits for all financial
institutions. In the Dawson Springs area, TFB-KY is the fifth largest financial
institution with 7% of total bank deposits and 6% of total deposits for all
financial institutions. In the Tompkinsville area, TFB-KY is the third largest
financial institution with 18% of total bank deposits and 18% of total deposits
for all financial institutions. In the Maysville area, TFB-KY is the largest
financial institution with 46% of total bank deposits and 38% of total deposits
for all financial institutions. In the Morehead area, TFB-KY ranks second with
40% of total bank deposits and 30% of total deposits for all financial
institutions. In the Augusta area, TFB-KY is the second largest financial
institution with 30% of total bank deposits and 30% of total deposits for all
financial institutions. TFB-Pikeville is the third largest financial
institution in Pikeville as of June 30, 1994, with 22% of total bank deposits
and 21% of total deposits for all financial institutions. TFB, FSB is the
third largest financial institution in Russellville with 20% of total bank
deposits and 17% of total deposits for all financial institutions. TFB-Martin
is the second largest financial institution in Floyd County with 29% of total
bank deposits and 28% of total deposits for all financial institutions. TFB-TN,
NA is the fifth largest financial institution in Cookeville with 8% of total
bank deposits and 8% of total deposits for all financial institutions. TFB-TN,
FSB is the largest financial institution in Tullahoma, Tennessee with 34% of
total bank deposits and 13% of total deposits for all financial institutions.
The company actively competes in its markets with other commercial banks and
financial institutions for all types of deposits, loans, trust accounts and the
provision of financial, trust, and other services. The company also competes
generally with insurance companies, savings and loan associations, credit
unions, brokerage firms, other financial institutions, and institutions which
have expanded into the quasi-financial market. Many of these competitors have
resources substantially in excess of those of the company, have broader
geographic markets and higher lending limits than the banks and, therefore, are
able to make larger loans, sell a broader product line, and make more effective
use of advertising than can the company or the banks.
Supervision and Regulation
Bank holding companies, commercial banks and savings banks are extensively
regulated under both federal and state law. Any change in applicable law or
regulation may have a material effect on the businesses and prospects of the
company and the banks.
The company, as a registered bank holding company, is subject to the
supervision of and regulation by the Federal Reserve Board under the Bank
Holding Company Act of 1956. Also, as a registered savings and loan holding
company, the company is subject to the supervision of and regulation by the
Office of Thrift Supervision ("OTS").
In addition, the company is subject to the provisions of Kentucky's and
Tennessee's banking laws regulating bank acquisitions and certain activities of
controlling bank shareholders.
TFB-KY, TFB-TN, NA, TFB-Pikeville, and TFB-Martin are subject to the
supervision of, and regular examination by, the Office of the Comptroller of the
Currency. TFB, FSB and TFB-TN, FSB are subject to the supervision of, and
regular examination by, the OTS. The Federal Deposit Insurance Corporation
insures the deposits of the banks to the current maximum of $100,000 per
depositor.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Act"), when fully phased in, will remove state law barriers to interstate
bank acquisitions and will permit the consolidation of interstate banking
operations. Under the Act, effective September 29, 1995, adequately capitalized
and managed bank holding companies may acquire banks in any state, subject to
(i) Community Reinvestment Act compliance, (ii) federal and state antitrust laws
and deposit concentration limits, and (iii) state laws restricting the
acquisition of a bank that has been in existence for less than a minimum period
of time (up to five years). The Act's interstate consolidation and branching
provisions will become operative on June 1, 1997, although any state can, prior
to that time, adopt legislation to accelerate interstate branching or prohibit
it completely. The Act's interstate consolidation and branching provisions will
permit banks to merge across state lines and, if state laws permit de novo
branching, to establish a new branch as its initial entry into a state.
Statistical Information
Certain statistical information is included in a separate section of the
report on pages 17 through 29 and on page 40, and those pages are incorporated
herein by reference.
Description of Statistical Information Page
Average Consolidated Balance Sheets and Net Interest Analysis 17
Analysis of Year-to-Year Changes in Net Interest Income 18
Loans Outstanding 20
Loan Maturities and Interest Rate Sensitivity 21
Nonperforming Assets (Including Potential Problem Loans) 21
Summary of Loan Loss Experience 23
Allocation of Allowance for Loan Losses 23
Allocation of Year-End Allowance for Loan Losses and
Percentage of Each Type of Loan to Total Loans 24
Carrying Value of Securities 25
Maturity Distribution of Securities 25
Maturity of Time Deposits of $100,000 or More 26
Short-Term Borrowings 26
Consolidated Statistical Information 29
Impact of Nonaccrual Loans on Interest Income 40
Item 2. Properties
The main banking office of TFB-KY, which also serves as the principal office
of the company, is located at 500 East Main Street, Bowling Green, Kentucky
42101. In addition, TFB-KY operates seventeen branches. All branches offer a
full range of banking services and most are equipped with an automated teller
machine for 24-hour banking services. TFB-KY owns all of the properties at which
it conducts its business except the Ashley Circle and Nashville Road branches in
Bowling Green and the Elizabethtown loan production office. TFB-KY also leases
property in Bowling Green for its operations center.
TFB, FSB owns its main banking office at 135 West Fourth Street, Russellville,
Kentucky and leases its branch facility at 107 West Main, Auburn, Kentucky.
TFB-TN, FSB owns all the properties at which it conducts business except the
Chattanooga, Nashville, Jackson, and Knoxville loan production offices and the
Blythewood branch office. TFB-TN, FSB also leases office spaces in Nashville,
Tennessee for certain administrative personnel. TFB-Pikeville owns all the
properties at which it conducts business except the Virgie branch and one of its
Pikeville branches (the North Mayo Trail branch).
TFB-TN, NA owns all the properties at which it conducts business except the
Franklin branch.
TFB-Martin owns all the properties at which it conducts business.
Note 7 to the company's consolidated financial statements included on page 41
of this report contains additional information relating to amounts invested in
premises and equipment.
Item 3. Legal Proceedings
In the ordinary course of operations, the banks are defendants in various
legal proceedings. In the opinion of management, there is no proceeding pending
or, to the knowledge of management, threatened in which an adverse decision
could result in a material adverse change in the business or consolidated
financial position of the company or the banks.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the last
quarter of the period covered by this report.
Item 4a. Executive Officers of the Registrant
The following table sets forth the name, age and position with the company and
the banks of the executive officers of the company as of December 31, 1994.
Officers of the company and the banks are elected annually.
Served as
an Executive Position with the
Name Officer Since Age Company and the Banks
Douglas M. Lester 1984 52 Chairman of the Board, President
and Chief Executive Officer of the
company; Chairman of the Board, President,
and Chief Executive Officer of TFB-KY;
Director of TFB-KY and TFB-Pikeville
Vince A. Berta 1993 36 Executive Vice President,
Treasurer, and Chief Financial Officer of
the company; Chief Financial Officer of
each of the banks; Director of TFB-TN,
FSB
Barry D. Bray 1984 48 Executive Vice President, Chief
Credit Officer and Director of the
company; Chief Credit Officer and
Director of TFB-KY
Roger E. Lundin 1987 50 Senior Vice President and
Director of Human Resources of the company
Michael J. Moser 1994 48 Senior Vice President and
Director of Marketing for the company
John T. Perkins 1984 51 Senior Vice President and Chief
Operations Officer of the company;
Director of TFB, FSB
Dena R. Schaaf 1992 38 Senior Vice President of Risk
Management and Compliance of the company
Jay B. Simmons 1993 38 Senior Vice President, General
Counsel and Secretary of the company;
Director of TFB-TN, FSB
Mr. Lester joined TFB-KY as its President and Chief Executive Officer in 1984,
prior to the time the company became the holding company of TFB-KY.
Mr. Berta joined the company in April 1993. Prior to that he was Vice
President and Manager of Functional Control with PNC Bank.
Mr. Bray joined TFB-KY in 1982 and has served as Chief Credit Officer since
1984. Mr. Bray was President of TFB-KY from December 1991 through March 1994. He
was elected Executive Vice President of the company in 1988.
Mr. Lundin, until joining TFB-KY in 1986, was employed by a division of
PACCAR, Inc., an automotive-related company, as Manager of Employee Relations.
Mr. Moser joined the company in July 1994. Prior to that, he was Senior Vice
President and Director of Corporate Marketing for West One Bancorp in Boise,
Idaho.
Mr. Perkins joined TFB-KY in 1973 and has served as Chief Operations Officer
since 1981.
Ms. Schaaf joined the company in November 1992. Prior to that, she was
Examiner-In-Charge of Asset Quality for regional banks with the Office of
Comptroller of Currency.
Mr. Simmons joined the company in November 1993. Prior to that, he was a
partner in a Denver law firm, specializing in financial institutions law, and
was a vice president on the legal staff of Colorado National Bankshares, Inc.
None of the above officers is related to another and there are no arrangements
or understandings between them and any other person pursuant to which any of
them was elected as an officer, other than arrangements or understandings with
directors or officers of the company acting solely in their capacities as such,
and other than the employment agreement between Mr. Lester and the company and
TFB-KY, which became effective January 1, 1991.
Part II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters
The registrant's common stock is traded on the NASDAQ National Market System
under the symbol TRFI. As of December 31, 1994, there were 1,907 shareholders of
record.
Following is a summary of market prices and dividends declared for the
registrant's common stock for the quarterly periods indicated:
Stock Price
High Low Dividend
First quarter, 1993 $24.00 $14.625 $.1275
Second quarter, 1993 23.75 19.25 .1275
Third quarter, 1993 20.25 17.00 .1275
Fourth quarter, 1993 18.75 14.50 .1275
First quarter, 1994 17.25 14.75 .14
Second quarter, 1994 16.00 12.75 .14
Third quarter, 1994 16.25 15.25 .14
Fourth quarter, 1994 15.9375 12.75 .14
Additional information for this item is included in Note 10 to the
consolidated financial statements on page 44 of this report.
Item 6. Selected Financial Data
The information for this item is included in the section entitled
"Consolidated Statistical Information" on page 29 of this report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information for this item is included in the section entitled
"Management's Discussion and Analysis," on pages 14 through 28 of this report.
Item 8. Financial Statements and Supplementary Data
The following consolidated financial statements of the registrant and report
of independent auditors are included in a separate section of this report on
pages 30 through 51:
Report of KPMG Peat Marwick LLP, Independent Auditors
Consolidated Balance Sheets - December 31, 1994 and 1993
Consolidated Statements of Income - Years ended December 31, 1994, 1993 and
1992
Consolidated Statements of Changes in Shareholders' Equity - Years ended
December 31, 1994, 1993 and 1992
Consolidated Statements of Cash Flows - Years ended December 31, 1994, 1993
and 1992
Notes to Consolidated Financial Statements
Additional information for this item is included in the table entitled
"Quarterly Results of Operations" on page 28 of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Part III
Item 10. Directors and Executive Officers of the Registrant
The information set out in the sections entitled "Voting Securities and
Ownership Thereof" and "Election of Directors" of the registrant's Proxy
Statement on pages 2 through 8 and the information set out in the section
entitled "Executive Officers of the Registrant" on page 7 of Part I of this
report are incorporated herein by reference.
Item 11. Executive Compensation
The information set out in the section entitled "Executive Compensation and
Other Information" of the registrant's Proxy Statement at pages 8 through 16 is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information set out in the section entitled "Voting Securities and
Ownership Thereof" of the registrant's Proxy Statement at pages 2 through 4 is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information set out in the sections entitled "Transactions with Management
and Others" and "Compensation Committee Interlocks and Insider Participation" of
the registrant's Proxy Statement on pages 14 through 16 is incorporated herein
by reference.
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Financial statements filed
The list of consolidated financial statements together with the
report thereon of KPMG Peat Marwick LLP, as set forth in Part II, Item 8
of this report is incorporated herein by reference.
(2) Financial statement schedules
Schedules to the consolidated financial statements are omitted, as
the required information is not applicable.
(3) List of exhibits
The list of exhibits listed on the Exhibit Index on pages 52 and 53
of this report is incorporated herein by reference.
The management contracts and compensatory plans or arrangements
required to be filed as exhibits to this Form 10-K pursuant to Item 14(c)
are noted by asterisk (*) in the Exhibit Index.
(b) Reports on Form 8-K
(1)The registrant filed on November 14, 1994, an amended report on
Form 8-K dated August 31, 1994 reporting
the merger of FGC Holding Company ("FGC") with and into the registrant,
and the issuance of 1,050,000 shares of common stock of the registrant,
pursuant to an Agreement and Plan of Reorganization and Plan of Merger
dated January 28, 1994.
The following consolidated financial statements of FGC, notes related
thereto and independent auditors' report thereon were filed as a part of
the report:
(a) Independent Auditors' Report;
(b) Consolidated Balance Sheets as of December 31, 1993 and 1992;
(c) Consolidated Statements of Income for the years ended December 31,
1993 and 1992;
(d) Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 1993 and 1992;
(e) Consolidated Statements of Cash Flows for the years ended December
31, 1993 and 1992; and
(f) Notes to Consolidated Financial Statements.
The following unaudited consolidated financial statements of FGC were
filed as a part of the report:
(a) Consolidated Balance Sheet as of June 30, 1994 (unaudited);
(b) Consolidated Statement of Income for the six months ended June 30,
1994 (unaudited); and
(c) Consolidated Statement of Cash Flows for the six months ended June
30,1994 (unaudited).
The following unaudited pro forma consolidated financial statements
of Trans Financial Bancorp, Inc. and notes related thereto were filed as
a part of the report:
(a) Pro Forma Balance Sheet as of June 30, 1994 (unaudited);
(b) Pro Forma Income Statement for the six months ended June 30, 1994
(unaudited);
(c) Pro Forma Income Statement for the year ended December 31, 1993
(unaudited);
(d) Pro Forma Income Statement for the year ended December 31, 1992
(unaudited);
(e) Pro Forma Income Statement for the year ended December 31, 1991
(unaudited); and
(f) Notes to Pro Forma Financial Statements (unaudited).
(2) The registrant filed on December 6, 1994, a report on Form 8-K
which included financial statements of Kentucky Community Bancorp, Inc.
and supplemental consolidated financial statements of Trans Financial
Bancorp, Inc.
The following consolidated financial statements of Kentucky Community
Bancorp, Inc., notes related thereto and independent auditors' report
thereon were filed as a part of the report:
(a) Independent Auditors' Report;
(b) Consolidated Balance Sheets as of December 31, 1993 and 1992;
(c) Consolidated Statements of Income for the years ended December 31,
1993, 1992 and 1991;
(d) Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1993, 1992 and 1991;
(e) Consolidated Statements of Cash Flows for the years ended December
31, 1993, 1992 and 1991; and
(f) Notes to Consolidated Financial Statements.
The following supplemental consolidated financial statements of
Trans Financial Bancorp, Inc., notes related thereto and independent
auditors' report thereon were filed as a part of the report:
(a) Independent Auditor's Report;
(b) Supplemental Consolidated Balance Sheets as of December 31, 1993
and 1992;
(c) Supplemental Consolidated Statements of Income for the years ended
December 31, 1993, 1992 and 1991;
(d) Supplemental Consolidated Statements of Changes in Shareholders'
Equity for the years ended December 31, 1993, 1992 and 1991;
(e) Supplemental Consolidated Statements of Cash Flows for the years
ended December 31, 1993, 1992 and 1991; and
(f) Notes to Supplemental Consolidated Financial Statements.
(c) Exhibits
The exhibits listed on the Exhibit Index on pages 52 and 53 of this Form
10-K are filed as a part of this report.
(d) Financial statement schedules
No financial statement schedules are required to be filed as a part of
this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Trans Financial Bancorp, Inc.
(Registrant)
By: /s/ Douglas M. Lester
Douglas M. Lester
Chairman of the Board, President
and Chief Executive Officer
Date: March 20, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 20, 1995, by the following persons on
behalf of the registrant and in the capacities indicated.
(a) Principal Executive Officer:
/s/ Douglas M. Lester
Douglas M. Lester
Chairman of the Board, President
and Chief Executive Officer
(b) Principal Financial Officer:
/s/ Vince A. Berta
Vince A. Berta
Executive Vice President
and Chief Financial Officer
(c) Principal Accounting Officer:
/s/ Edward R. Matthews
Edward R. Matthews
Controller
<PAGE>
(d) Directors:
/s/ Barry D. Bray /s/ Carroll F. Knicely
Barry D. Bray Carroll F. Knicely
/s/ Mary D. Cohron /s/ Douglas M. Lester
Mary D. Cohron Douglas M. Lester
/s/ Floyd H. Ellis /s/ C. Cecil Martin
Floyd H. Ellis C. Cecil Martin
/s/ J. David Francis /s/ Frank Mastrapasqua
J. David Francis Frank Mastrapasqua
/s/ Roy E. Gaddie /s/ Joseph I. Medalie
Roy E. Gaddie Joseph I. Medalie
/s/ John B. Gaines /s/ James D. Scott
John B. Gaines James D. Scott
/s/ David B. Garvin /s/ Charles M. Stewart
David B. Garvin Charles M. Stewart
/s/ Wayne Gaunce /s/ William B. Van Meter
ayne Gaunce William B. Van Meter
/s/ C.C. Howard Gray /s/ Thomas R. Wallingford
C.C. Howard Gray Thomas R. Wallingford
/s/ Charles A. Hardcastle /s/ Roland D. Willock
Charles A. Hardcastle Roland D. Willock
<PAGE>
Trans Financial Bancorp, Inc.
Annual Report on Form 10-K
For the Year Ended December 31, 1994
Items 1, 2, 5, 6, 7, 8 and 14 (a)(1)
Financial Statements and Supplementary Data
Market for the Registrant's Common Equity and Related Shareholder Matters
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of
Operations
<PAGE>
Management's Discussion and Analysis
FINANCIAL OVERVIEW
Trans Financial Bancorp, Inc., ("the company") is a bank and savings and loan
holding company registered under the Bank Holding Company Act of 1956 and the
Home Owners' Loan Act, which has four commercial bank subsidiaries:
Trans Financial Bank, National Association, headquartered in Bowling Green,
Kentucky ("TFB-KY"),
Trans Financial Bank, headquartered in Pikeville, Kentucky ("TFB-Pikeville"),
Trans Financial Bank Tennessee, National Association, headquartered in
Cookeville, Tennessee ("TFB-TN, NA"), and
Trans Financial Bank of Martin, National Association, headquartered in Martin,
Kentucky, ("TFB-Martin")
and two thrift subsidiaries:
Trans Financial Bank, Federal Savings Bank, headquartered in Russellville,
Kentucky, ("TFB, FSB") and
Trans Financial Bank of Tennessee, F.S.B., headquartered in Tullahoma,
Tennessee, ("TFB-TN, FSB").
Collectively, these six institutions are referred to in this report as "the
banks."
In addition, the company has a full-service securities broker/dealer, Trans
Financial Investment Services, Inc.; a mortgage banking company, Trans Financial
Mortgage Company; and a full-service travel agency, Trans Travel Agency, Inc.
At December 31, 1994, the company had total consolidated assets of $1.6
billion, total loans of $1.1 billion, total deposits of $1.3 billion and
shareholders' equity of $111.6 million. The company's net income increased 2.6%
in 1994, to $14.4 million, from $14.1 million in 1993, and earnings per share
increased 3.2% to $1.28 per common share, from $1.24 in 1993.
Over the past several years, the company has expanded through mergers and
acquisitions. These mergers and acquisitions are more fully described below.
The company merged with Kentucky Community Bancorp, Inc. ("KCB") on February
15, 1994, with Peoples Financial Services, Inc. ("PFS") on April 22, 1994, and
with FGC Holding Company ("FGC") on August 31, 1994.
KCB, of Maysville, Kentucky, was the holding company for The State National
Bank, Peoples First Bank, and Farmers Liberty Bank, with combined assets of
approximately $175 million. These three banks were consolidated into the
operations of TFB-KY on March 31, 1994. Under the terms of the merger with KCB,
all shares of KCB common stock outstanding were converted into 1,374,962 shares
of common stock of the company.
PFS, of Cookeville, Tennessee, was the holding company for Peoples Bank and
Trust of the Cumberlands ("Peoples Bank") and Citizens Federal Savings Bank
("Citizens"), with combined assets of approximately $123 million. Peoples Bank
became TFB-TN, NA and Citizens was consolidated into the operations of TFB-TN,
FSB on July 31, 1994. Under the terms of the merger with PFS, all shares of PFS
common stock were converted into 1,302,254 shares of common stock of the
company.
FGC, of Martin, Kentucky, was the holding company for First Guaranty National
Bank ("First Guaranty"), with approximately $127 million in assets. First
Guaranty became TFB-Martin on September 30, 1994. Under the terms of the merger
with FGC, all shares of FGC common stock were converted into 1,050,000 shares of
common stock of the company and the shares of FGC preferred stock were retired.
Each of these three mergers has been accounted for using the pooling-of-
interests method of accounting and, accordingly, financial statements for all
periods have been restated to reflect the results of operations of these
companies on a combined basis from the earliest period presented except for
dividends per share.
On July 6, 1993, in a transaction accounted for using the purchase method of
accounting, the company acquired Trans Kentucky Bancorp, Pikeville, Kentucky,
the holding company for The Citizens Bank of Pikeville. At the acquisition date,
TFB-Pikeville (the former Citizens Bank of Pikeville) had total assets of $207
million, net loans of $108 million and total deposits of $164 million. The
aggregate cost, including consideration and acquisition costs, totaled $19
million.
Effective March 26, 1992, the company acquired First Federal Savings Bank of
Tennessee, Tullahoma, Tennessee, in a combination stock and cash purchase valued
at $11 million. On March 27, 1992, the company acquired Maury Federal Savings
Bank, Columbia, Tennessee, for $11 million in cash. These two thrift
institutions had combined assets of $279 million, net loans of $185 million and
deposits of $252 million. On August 7, 1992, the company, through its Tullahoma
affiliate, acquired the deposits and branch operations of five middle Tennessee
branches of Heritage Federal Bank for Savings ("Heritage Federal"). The five
acquired branches had approximately $55 million in deposits and $2 million in
premises and equipment, and the company received approximately $52 million in
cash (net of an $800 thousand premium). These three acquisitions were
consolidated on November 27, 1992, to create TFB-TN, FSB, and were accounted for
using the purchase method of accounting.
On December 31, 1992, the company merged with Dawson Springs Bancorp, Inc.
("DSB"), the holding company for Kentucky State Bank, Scottsville, Kentucky, and
Commercial Bank of Dawson, Dawson Springs, Kentucky, by issuing 560,088 shares
of common stock of the company. These two banks, with combined assets of
approximately $73 million, were merged into TFB-KY on December 31, 1992. The DSB
merger was accounted for using the pooling-of-interests method of accounting
and, accordingly, all financial data has been restated as if the entities were
combined for all periods presented.
Over the past three years, the company has emphasized investment in
infrastructure in order to control operating risks, support internal growth and
future acquisitions, and facilitate the introduction of new products.
Investments have been made in data processing hardware and software upgrades,
which enable the company to process transactions more efficiently, to realize
economies of scale and to maintain quality control. Management believes that
these expenditures have enhanced the company's franchise and positioned it for
future acquisitions and entry into new lines of business.
The discussion that follows is intended to provide insight into the company's
results of operations and financial condition. This discussion should be read in
conjunction with the consolidated financial statements and accompanying notes
presented elsewhere in this report.
As previously discussed, the company consummated several business acquisitions
prior to 1994 which were accounted for using the purchase method of accounting.
Accordingly, the results of operations of those acquired entities prior to the
acquisition dates have not been included in the results of operations.
Therefore, ratios or analyses for periods before and after these purchase
acquisitions may not be comparable. In this discussion and analysis some
comparisons exclude the effect of the TFB-Pikeville acquisition. These
comparisons are not intended to imply that it is more appropriate to compare the
company's financial condition and results of operations without including TFB-
Pikeville, but rather to quantify a significant factor affecting the
comparability of the periods presented. The DSB, KCB, PFS and FGC mergers were
accounted for using the pooling-of-interests method of accounting and,
accordingly, all financial data for prior periods were restated as if the
entities had been combined for all periods presented. See note 3 to the
consolidated financial statements for additional information regarding business
combinations. All per share data in this report has been adjusted to give effect
to stock splits.
Income Statement Review
<TABLE>
Condensed Consolidated Statements of Income
For the years ended December 31
<CAPTION>
Dollars in thousands, except Change Change
per share data
1994 Amount % 1993 Amount % 1992
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income $113,982 $11,163 10.9% $102,819 $7,476 7.8 % $95,343
Interest expense 47,375 3,125 7.1 44,250 (2,513) (5.4) 46,763
Net interest income 66,607 8,038 13.7 58,569 9,989 20.6 48,580
Provision for loan losses 2,212 (582) (20.8) 2,794 176 6.7 2,618
Net interest income after
provision for loan 64,395 8,620 15.5 55,775 9,813 21.4 45,962
losses
Non-interest income 17,170 138 0.8 17,032 3,239 23.5 13,793
Non-interest expenses 60,070 7,240 13.7 52,830 12,940 32.4 39,890
Income before income taxes and
cumulative effect of change
in accounting principle 21,495 1,518 7.6 19,977 112 0.6 19,865
Income tax expense 7,075 852 13.7 6,223 (177) (2.8) 6,400
Income before cumulative effect
of change in accounting 14,420 666 4.8 13,754 289 2.1 13,465
principle
Cumulative effect of change in
accounting principle - (296) (100.0) 296 296 NM -
Net income $14,420 $370 2.6 % $14,050 $585 4.3 % $13,465
Earnings per common share $1.28 $0.04 3.2 % $1.24 $(0.01) (0.8)% $1.25
NM = not meaningful
</TABLE>
Net income was $14.4 million in 1994, compared with $14.1 million in 1993, and
$13.5 million in 1992. On a per share basis, net income was $1.28 in 1994,
$1.24 in 1993 and $1.25 in 1992. Earnings per share decreased in 1993 versus
1992 because of the increased number of average shares outstanding - a result of
a 1993 public stock offering by Citizens and the full-year impact of the 1992
public stock offering and stock issued in connection with the TFB-TN, FSB
acquisition.
The increases in net income were due to (in thousands):
1994 vs. 1993 1993 vs. 1992
-The TFB-Pikeville acquisition
net of the related interest on debt) $ 228 $ 874
Excluding TFB-Pikeville from all periods:
-Increased net interest income 4,874 6,917
-A lower (higher) provision for loan losses 702 (176)
-Increased (decreased) non-interest income (398) 2,360
-Higher non-interest expenses (3,989) (10,169)
-Lower (higher) income taxes (1,047) 779
Total increase in net income $ 370 $ 585
Each of these components of income and expense is discussed separately in the
sections that follow.
Net Interest Income
Net interest income (the difference between interest income on interest-
earning assets and interest expense on interest-bearing liabilities) totaled
$66.6 million in 1994, compared with $58.6 million in 1993 and $48.6 million in
1992. This represents a 13.7% increase in 1994 over 1993. The increase from 1992
to 1993 was 20.6%.
Net Interest Analysis Summary (1)
For the years ended December 31
Basis Basis
Point Point
1994 Change 1993 Change 1992
Average yield on interest-earning 7.81 % 22 7.59 % (87) 8.46 %
assets
Average rate on interest-bearing 3.65 (3) 3.68 (92) 4.60
liabilities
Net interest-rate spread 4.16 25 3.91 5 3.86
Impact of non-interest-bearing sources
and other
changes in balance sheet composition 0.41 - 0.41 (4) 0.45
Net interest margin 4.57 % 25 4.32 % 1 4.31 %
(1)Refer to the tables on pages 17 and 18 for additional data regarding net
interest income.
The increase in net interest income in both 1994 and 1993 was primarily a
result of a higher level of interest-earning assets due to loan growth, which
was further enhanced by an increase in the net interest margin. Average interest
earning assets for 1994 increased $104 million over 1993, while the net interest
margin increased 25 basis points. The higher margin in 1994 reflects the
positive impact of increases in the prime rate as well as a more favorable mix
of earning assets due to continued loan growth and the maturity of lower-rate
investment securities.
The increase in average interest-earning assets in 1993 over 1992 was due
to the TFB-Pikeville acquisition (providing an $89 million increase in the
company's average interest-earning assets), loan growth ($99 million excluding
TFB-Pikeville) and the full-year impact of investment securities purchased from
funds provided in the Heritage Federal branch acquisition. The net interest
margin and net interest-rate spread increased in 1993 and 1992 due to the
company's interest-bearing liabilities repricing downward more rapidly than
yields on interest-earning assets. During that time, the market spread between
the prime rate and the federal funds rate increased. A significant amount of the
company's loans are tied to the prime rate and funded by relatively short-term
deposits. Short-term deposits tend to follow movements in short-term U.S.
Treasury securities, which move up or down more quickly than the prime rate.
Accordingly, as the spread between the prime rate and shorter-term rates
widened, so did the company's net interest margin and net interest-rate spread.
<PAGE>
<TABLE>
Average Consolidated Balance Sheets and Net Interest Analysis
For the years ended December 31
Dollars in thousands
1994 1993 1992
Average Average Average Average Average Average
Balance(1) Interest Rate Balance(1) Interest Rate Balance(1) Interest Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning
assets:
Securities
held to maturity:
U.S. Treasury,
federal
agencies, and
mortgage-backed $69,766 $3,967 5.69 % $316,175 $19,060 6.03 % $311,038 $22,737 7.31 %
securities
State and 50,111 2,770 5.53 36,343 2,211 6.08 28,808 1,941 6.74
municipal
obligations
Other securities 5,723 396 6.92 14,441 844 5.84 14,179 809 5.71
Total 125,600 7,133 5.68 366,959 22,115 6.03 354,025 25,487 7.20
securities held
to maturity
Securities
available for
sale:
U.S.
Treasury, federal
agencies, and
mortgage-backed 214,749 11,477 5.34 19,715 796 4.04 - - -
securities
Other securities 13,526 708 5.23 - - - - - -
Total 228,275 12,185 5.34 19,715 796 4.04 - - -
securities
available for
sale
Total 353,875 19,318 5.46 386,674 22,911 5.93 354,025 25,487 7.20
securities
Federal funds 13,424 540 4.02 36,334 976 2.69 23,321 867 3.72
sold
Interest- 235 104 NM 1,001 120 NM 6,264 306 4.89
bearing deposits
with banks
Loans, net of 1,091,493 94,020 8.61 930,816 78,812 8.47 743,125 68,683 9.24
unearned
income(2)
Total interest-
earning assets /
interest income 1,459,027 113,982 7.81 1,354,825 102,819 7.59 1,126,735 95,343 8.46
Less allowance (12,742) (11,181) (8,907)
for loan loss
1,446,285 1,343,644 1,117,828
Non-interest-
earning assets:
Cash and due 65,788 55,359 45,720
from banks
Premises and 35,275 30,057 22,429
equipment
Other assets 40,712 34,774 34,499
Total assets $1,588,060 $1,463,834 $1,220,476
Liabilities and
Shareholders'
Equity
Interest-bearing
liabilities:
Interest-
bearing deposits:
Interest- $143,189 $3,434 2.40 $118,939 $2,870 2.41 $108,364 $3,296 3.04
bearing demand
Savings 155,819 4,351 2.79 135,013 3,900 2.89 97,941 3,493 3.57
deposits
Money market 55,636 1,485 2.67 59,069 1,555 2.63 46,745 1,584 3.39
accounts
TransPlus 100,638 2,462 2.45 97,960 2,463 2.51 84,287 2,711 3.22
(SuperNOW)
Certificates 633,608 26,040 4.11 624,638 25,934 4.15 552,378 28,982 5.25
of deposit
Other time 92,122 3,952 4.29 98,471 4,764 4.84 85,940 4,679 5.44
deposits
Total 1,181,012 41,724 3.53 1,134,090 41,486 3.66 975,655 44,745 4.59
interest-bearing
deposits
Federal funds
purchased and 40,303 1,253 3.11 28,084 673 2.40 26,483 919 3.47
repurchase
agreements
Other short- 36,669 1,715 4.68 6,624 238 3.59 506 63 12.45
term borrowings
Long-term debt 40,756 2,683 6.58 33,974 1,853 5.45 13,058 1,036 7.93
Total 117,728 5,651 4.80 68,682 2,764 4.02 40,047 2,018 5.04
borrowed funds
Total interest-
bearing
liabilities /
interest 1,298,740 47,375 3.65 1,202,772 44,250 3.68 1,015,702 46,763 4.60
expense
Non-interest-
bearing
liabilities:
Non-interest- 168,746 145,275 99,718
bearing deposits
Other 8,687 9,686 12,580
liabilities
Total 1,476,173 1,357,733 1,128,000
liabilities
Shareholders' 111,887 106,101 92,476
equity
Total
liabilities
and $1,588,060 $1,463,834 $1,220,476
shareholders'
equity
Net interest- 4.16 % 3.91 % 3.86 %
rate spread(3)
Impact of non-interest bearing sources
and
other changes in balance sheet 0.41 0.41 0.45
composition
Net interest
income /
margin on 4.57 % 4.32 % 4.31 %
interest-earning $66,607 $58,569 $48,580
assets(4)
NM = not meaningful
(1)Average balances are based on daily balances.
(2)Includes mortgage loans held for sale. For computational purposes,
non-accrual loans are included in interest-earning assets.
(3)Net interest spread is the difference between the average rate of interest
earned on interest-earning assets and the average rate of interest expensed on
interest-bearing liabilities.
(4)Net interest margin is net interest income divided by average interest-
earning assets.
</TABLE>
<PAGE>
Analysis of Year-to-Year Changes in Net Interest Income
The following table shows changes in interest income and interest expense
resulting from changes in volume and interest rates for the years ended December
31, 1994 and 1993, as compared to the previous year.
<TABLE>
<CAPTION>
1994 vs. 1993 1993 vs. 1992
Increase (decrease) Increase (decrease)
in interest income and expense in interest income and expense
In thousands due to changes in: due to changes in:
Rate Volume Total Rate Volume Total
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Securities held to
maturity:
U.S. Treasury, federal
agencies, and
mortgage-backed $(1,025) $(14,068) $(15,093) $(4,047) $370 $(3,677)
securities
State and municipal (217) 776 559 (202) 472 270
obligations
Other securities 133 (581) (448) 20 15 35
Total securities held (1,109) (13,873) (14,982) (4,229) 857 (3,372)
to maturity
Securities available for
sale:
U.S. Treasury, federal
agencies, and
mortgage-backed 338 10,343 10,681 - 796 796
securities
Other securities - 708 708 - - -
Total securities 338 11,051 11,389 - 796 796
available for sale
Total securities (771) (2,822) (3,593) (4,229) 1,653 (2,576)
Federal funds sold 351 (787) (436) (285) 394 109
Interest-bearing 131 (147) (16) 208 (394) (186)
deposits with banks
Loans, net of unearned 1,389 13,819 15,208 (6,126) 16,255 10,129
income
Total interest-earning 1,100 10,063 11,163 (10,432) 17,908 7,476
assets
Interest-bearing
liabilities:
Interest-bearing
deposits:
Interest-bearing (18) 582 564 (726) 300 (426)
demand
Savings deposits (134) 585 451 (748) 1,155 407
Money market accounts 21 (91) (70) (396) 367 (29)
TransPlus (SuperNOW) (67) 66 (1) (647) 399 (248)
Certificates of (264) 370 106 (6,534) 3,486 (3,048)
deposit
Other time deposits (517) (295) (812) (554) 639 85
Total interest-bearing (979) 1,217 238 (9,605) 6,346 (3,259)
deposits
Federal funds purchased
and repurchase 235 345 580 (299) 53 (246)
agreements
Other short-term 92 1,385 1,477 (75) 250 175
borrowings
Long-term debt 423 407 830 (408) 1,225 817
Total borrowed funds 750 2,137 2,887 (782) 1,528 746
Total interest-bearing (229) 3,354 3,125 (10,387) 7,874 (2,513)
liabilities
Increase (decrease) in net $1,329 $6,709 $8,038 $(45) $10,034 $9,989
interest income
</TABLE>
The change in interest income and expense due to both rate and volume has been
allocated to changes in average volume and changes in average rates in
proportion to the relationship of absolute dollar amounts of change in each.
Provision for Loan Losses
The provision for loan losses was $2.2 million (.21% of average loans) in 1994
down from $2.8 million (.31% of average loans) in 1993 and $2.6 million (.36% of
average loans) in 1992. Net loan charge-offs were $2.2 million in 1994, compared
with $2.3 million in 1993 and $1.7 million in 1992. As a percentage of average
loans, net charge-offs were .20% in 1994, down from .26% in 1993, .24% in 1992
and an average of .28% for the five year period 1990-1994. The provision for
loan losses and the level of the allowance for loan losses reflect the quality
of the loan portfolio and result from management's evaluation of the risks in
the loan portfolio. Further discussion on loan quality and the allowance
for loan losses is included later in this review in the Asset Quality
discussion.
Non-Interest Income
Non-interest income for 1994 increased less than 1% over 1993, after
increasing 24% from 1992 to 1993. The increases in non-interest income were due
to (in thousands):
1994 vs. 1993 1993 vs. 1992
- The TFB-Pikeville acquisition $ 536 $ 879
Excluding TFB-Pikeville from all periods:
- Increase in service charges on
deposit accounts 570 997
- Increase (decrease) in gains on sales
of securities (893) 259
- Increase in loan servicing fees 785 655
- Decrease in gains on sales of mortgage
loans held for sale (1,149) (417)
- Increase in trust service fees 108 180
- Increase in brokerage income 416 204
- Increase (decrease) in all other
non-interest income (235) 482
Total increase in non-interest income $ 138 $3,239
In early 1994, the company employed an outside consulting firm to review its
products and services. As an outcome of this review, the company implemented a
new product and fee structure which resulted in additional service charges on
deposit accounts. The company also grew its portfolio of mortgage loans serviced
for others. The portfolio has grown from $637 million at December 31, 1992, to
$690 million at the end of 1993, to $1.3 billion at December 31, 1994, primarily
by in-house originations and by acquiring servicing portfolios. The result of
these acquisitions has been an increase in mortgage servicing fees from $1.5
million in 1992, to $2.2 in 1993 and to $3.0 million in 1994. The company
realized gains on the sale of mortgage loans of $949 thousand in 1993, during a
declining interest rate environment, and a loss of $200 thousand in 1994 as the
interest rate trend reversed. In late 1994, the company established a securities
brokerage subsidiary, the positive effect of which can be seen in additional
brokerage income for the year.
Non-Interest Expenses
Non-interest expenses for 1994 increased 14% over 1993, after increasing 32%
from 1992 to 1993. The increases in non-interest expense were due to (in
thousands):
1994 vs. 1993 1993 vs. 1992
- The TFB-Pikeville acquisition $3,251 $ 2,771
Excluding TFB-Pikeville from all periods:
- Increase in compensation and employee
benefits 1,434 4,112
- Increase in occupancy and equipment
expense 1,097 1,523
- Increase in deposit insurance premiums 198 236
- Increase in professional fees 1,228 691
- Increase in postage, printing and supplies 536 469
- Increase in communications expense 50 282
- Increase (decrease) in other
non-interest expenses (554) 2,856
Total increase in non-interest expenses $7,240 $12,940
Professional fees increased $1.3 million in 1994 ($1.2 million excluding TFB-
Pikeville) and $.7 million in 1993 ($.7 million excluding TFB-Pikeville). These
expenses, principally related to mergers and acquisitions and the development of
new lines of business, coupled with other expenses related to the relocation to
a new operation center, were the underlying causes of the higher non-interest
expenses in 1994 and 1993. The majority of the increases in 1993 over 1992 were
related to the purchase acquisitions consummated in 1992 and 1993. In general,
the remaining increases in both 1993 and 1994 were related to an effort to build
the company's infrastructure to accommodate future growth, requiring investments
in staff as well as in buildings, equipment and information systems.
Compensation and benefits increased $3.1 million in 1994 ($1.4 million
excluding TFB-Pikeville), after increasing $5.4 million in 1993 ($4.1 million
excluding TFB-Pikeville) - the result of an expansion of the professional staff
as well as 1993 being the first full year in which TFB-TN, FSB was included in
the company's operating results.
Occupancy and furniture and equipment costs increased $1.5 million in 1994
($1.1 million excluding TFB-Pikeville) compared with 1993. In 1993 these costs
were up $2.1 million ($1.5 million excluding TFB-Pikeville). Depreciation, the
renovation of TFB, FSB branches and corporate offices, and the relocation to a
new operation center comprised the remaining portion of the increase in 1993
over 1992.
All other non-interest expenses (including deposit insurance, communications,
and postage, printing and supplies) were up $1.3 million in 1994 over 1993 ($.2
million excluding TFB-Pikeville). Other non-interest expenses increased $4.8
million in 1993 ($3.8 million excluding TFB-Pikeville), of which $.5 million was
attributable to the consolidation and conversion of mortgage loan operations,
$.2 million to amortization of intangible assets related to purchase
acquisitions, $.5 million to FDIC and other insurance, $.2 million related to
the prepayment of mortgage loans serviced for others, and $.2 million related to
foreclosed and repossessed assets.
Income Taxes
In the first quarter of 1993 the company adopted Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes, resulting in a $296
thousand increase in net income. Excluding the effect of adopting Statement 109,
the company had income tax expense of $7.1 million in 1994, compared with $6.2
million in 1993, and $6.4 million in 1992. These represent effective tax rates
of 32.9%, 31.2% and 32.2%, respectively. Further information on the company's
income tax position can be found in note 11 to the consolidated financial
statements.
Balance Sheet Review
Assets at year-end 1994 totaled $1.6 billion, compared with $1.6 billion at
December 31, 1993, and $1.4 billion at the end of 1992. Average total assets
increased $124 million in 1994 to $1.6 billion, after increasing $243 million in
1993. Average interest-earning assets increased 8% to $1.5 billion in 1994,
after increasing 20% in 1993. The TFB-Pikeville acquisition contributed $193
million to total assets at year-end 1993 and $89 million to the increase in
average interest-earning assets for that year.
Loans
Total loans, excluding mortgages held for sale, averaged $1,074 million in
1994, compared with $899 million in 1993 and $719 million in 1992. At year-end
1994, loans totaled $1,144 million, compared with $1,007 million at December 31,
1993 and $781 million at the end of 1992. TFB-Pikeville's loan portfolio at
December 31, 1993, represents $121 million of the increase from year-end 1992 to
1993.
The company continues to experience strong loan growth throughout its markets,
with particular strength in middle market commercial lending products. The
following table presents a summary of the loan portfolio by category for each of
the last five years. Much of the increase in both commercial and commercial real
estate loans represents loans to finance the operations of corporate customers.
While many of these loans are structured as mortgages, in nearly every case the
company is relying on the borrower's cash flow to service the loan and very few
are dependent on the operation or sale of the collateral. Other than the
categories noted, there is no concentration of loans in any industry greater
than 5% of the total loan portfolio. The company has no foreign loans or highly
leveraged transactions in its loan portfolio.
<TABLE>
Loans Outstanding
December 31
<CAPTION>
In thousands 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
Commercial $318,970 $320,952 $235,922 $200,020 $189,752
Commercial real estate 334,567 234,308 140,554 114,218 105,160
Residential real estate 339,488 304,990 293,393 171,643 159,000
Consumer 153,754 150,202 114,820 87,105 88,567
Total loans 1,146,779 1,010,452 784,689 572,986 542,479
Less unearned income (3,063) (3,656) (3,843) (5,032) (3,961)
Loans net of $1,143,716 $1,006,796 $780,846 $567,954 $538,518
unearned income
</TABLE>
The following table sets forth the maturity distribution and interest rate
sensitivity of selected loan categories at December 31, 1994. Maturities are
based upon contractual terms. The company's policy is to specifically review and
approve all loans renewed; loans are not automatically rolled over. The table
excludes residential real estate and consumer loans.
Loan Maturities and Interest
Rate Sensitivity
December 31, 1994
In thousands One Year One Through Over Total
or Less Five Years Five Years Loans
Commercial $243,860 $48,140 $26,970 $318,970
Commercial real estate 238,374 57,700 38,493 334,567
Total $482,234 $105,840 $65,463 $653,537
Fixed rate loans $42,147 $98,720 $65,463 $206,330
Floating rate loans 440,087 7,120 - 447,207
Total $482,234 $105,840 $65,463 $653,537
Asset Quality
With respect to asset quality, management considers three categories of assets
to warrant constant scrutiny. These categories include (a) loans which are
currently nonperforming, (b) other real estate and loans classified as
in-substance foreclosures, and (c) loans which are currently performing but
which management believes require special attention.
Nonperforming loans, which include non-accrual loans, accruing loans past due
over 90 days and restructured loans, totaled $7.9 million at the end of 1994, a
decrease of $2.0 million from 1993. The ratio of nonperforming loans to year-end
loans was .69%, compared with .98% at year-end 1993 and 1.15% at December 31,
1992. Nonperforming assets, which include nonperforming loans, other real
estate, loans classified as in-substance foreclosures, and other foreclosed
property, totaled $13.1 million at year-end 1994, and the ratio of total
nonperforming assets to total assets decreased from .99% at December 31, 1993,
to .81% at year-end 1994.
The following table presents information concerning nonperforming assets,
including nonaccrual and restructured loans. Management classifies a loan as
nonaccrual when principal or interest is past due 90 days or more and the loan
is not adequately collateralized and in the process of collection, or when, in
the opinion of management, principal or interest is not likely to be paid in
accordance with the terms of the obligation. Consumer installment loans are
charged off after 120 days of delinquency unless adequately secured and in the
process of collection. Loans are not reclassified as accruing until principal
and interest payments are brought current and future payments appear reasonably
certain. Loans are categorized as restructured if the original interest rate,
repayment terms, or both were restructured due to a deterioration in the
financial condition of the borrower. However, restructured loans that
demonstrate performance under the restructured terms and that yield a market
rate of interest may be removed from restructured status in the year following
the restructure.
Nonperforming Assets
December 31
Dollars in thousands
1994 1993 1992 1991 1990
Nonaccrual loans $4,375 $5,926 $3,986 $2,770 $4,694
Accruing loans which are
contractually
past due 90 days or more 3,514 2,377 4,262 2,255 3,035
Restructured loans 30 1,591 718 5,587 1,615
Total nonperforming and 7,919 9,894 8,966 10,612 9,344
restructured loans
Other real estate and in- 4,998 5,869 9,036 6,455 6,207
substance foreclosures
Other foreclosed property 199 113 - - -
Total nonperforming and
restructured loans
and foreclosed property $13,116 $15,876 $18,002 $17,067 $15,551
Nonperforming and restructured loans
as a percentage of loans 0.69% 0.98% 1.15% 1.87% 1.74%
net of unearned income
Nonperforming and restructured loans and other
real estate as a 0.81% 0.99% 1.30% 1.75% 1.84%
percentage of total assets
Two credit relationships account for $2.2 million, or 51%, of the December 31,
1994, nonaccrual balance. The first of these loans is to a manufacturing concern
and is secured by commercial real estate and equipment. The loan has been on
nonaccrual since 1992. During 1993, $775,000 of the loan balance was charged
off, reducing the carrying value of the loan to $1.5 million. In the second
quarter of 1994, the borrower resumed making partial principal payments and, at
December 31, 1994, the carrying value of the loan was $1,456,000. Appropriate
amounts have been specifically allocated in the evaluation of the allowance for
loan losses for this credit exposure. The second loan has an outstanding balance
of $783,000 and is secured by a first mortgage on an apartment complex. The
borrowers experienced cash flow difficulties due to high vacancy rates and the
loan was placed on nonaccrual in 1994, when it became apparent that payments
would not remain timely. The property is expected to be sold in the first
quarter of 1995, at a price sufficient to liquidate the principal balance. The
remaining December 31, 1994, nonaccrual balance consists of various commercial
and consumer loans, with no single loan exceeding $200,000.
Other real estate and in-substance foreclosures at December 31, 1994, includes
two properties with an aggregate book value of $2.7 million, or 55% of the
outstanding balance. The first property was acquired through foreclosure in
1986 with an unsatisfied loan balance at the time of $1.8 million. In order to
facilitate the disposal of the property, the company entered into a joint
venture with a real estate developer and developed the land for industrial and
other commercial use. During 1993, the company dissolved the joint venture and
retained title to the property. Several parcels have been sold above carrying
value. The book value of the property at December 31, 1994, including
capitalized development costs, was $1.2 million. Based on an appraisal of the
property and previous sales experience, management does not anticipate any
significant loss to be incurred on disposition. The second property included in
other real estate and in-substance foreclosures relates to a wood products
manufacturing facility. Based on an appraisal of the property, the company wrote
down its carrying value by $210 thousand in the third quarter of 1994, reducing
it to its current balance of $1.5 million. The facility was closed in 1992 and
is presently listed for sale with a commercial real estate firm. Management is
of the opinion that no significant additional loss will be incurred in the
disposal of the property.
As of December 31, 1994, the company had $2.3 million of loans which were not
included in the past due, nonaccrual or restructured categories, but for which
known information about possible credit problems caused management to have
doubts as to the ability of the borrowers to comply with the present loan
repayment terms. Based on management's evaluation, including current market
conditions, cash flow generated and recent appraisals, no significant losses are
anticipated to be incurred in connection with these loans. These loans are
subject to continuing management attention and are considered in determining the
level of the allowance for loan losses.
The allowance for loan losses is established through a provision for loan
losses charged to expense. The allowance represents an amount which, in
management's judgment, will be adequate to absorb probable losses on existing
loans. At December 31, 1994, the allowance was $12.5 million, compared with
$12.5 million at December 31, 1993, and $9.6 million at year-end 1992. The
allowance as a percentage of nonperforming loans (an indication of the relative
ability to cover future loan losses with existing reserves) increased to 158% at
year-end 1994, from 126% at December 31, 1993, and 107% at December 31, 1992.
The ratio of the allowance for loan losses to total loans (excluding mortgage
loans held for sale) at December 31, 1994, was 1.10%, compared with 1.24% at
December 31, 1993, and 1.23% at the end of 1992.
Following is a summary of the changes in the allowance for loan losses for
each of the past five years.
Summary of Loan Loss
Experience
For the years ended
December 31
Dollars in thousands 1994 1993 1992 1991 1990
Balance at beginning of $12,505 $9,596 $7,700 $7,183 $6,312
year
Provision for loan 2,212 2,794 2,618 2,242 3,416
losses
Balance of allowance
for loan losses
of acquired - 2,433 1,016 - 48
subsidiaries at
acquisition date
Amounts charged off:
Commercial and 1,873 2,195 1,623 1,322 1,904
commercial real estate
Residential real 80 315 138 119 602
estate
Consumer 838 936 738 996 1,073
Total loans charged 2,791 3,446 2,499 2,437 3,579
off
Recoveries of amounts
previously charged off:
Commercial and 232 615 323 364 439
commercial real estate
Residential real 41 115 106 21 249
estate
Consumer 330 398 332 327 298
Total recoveries 603 1,128 761 712 986
Net charge-offs 2,188 2,318 1,738 1,725 2,593
Balance at end of year $12,529 $12,505 $9,596 $7,700 $7,183
Total loans, net of
unearned income:
Average $1,073,718 $898,834 $719,184 $553,549 $503,035
At December 31 1,143,716 1,006,796 780,846 567,954 538,518
As a percentage of
average loans:
Net charge-offs 0.20 % 0.26 % 0.24 % 0.31 % 0.52 %
Provision for loan 0.21 % 0.31 % 0.36 % 0.41 % 0.68 %
losses
Allowance as a 1.10 % 1.24 % 1.23 % 1.36 % 1.33 %
percentage of year-end
loans
Allowance as a multiple 5.7X 5.4X 5.5X 4.5X 2.8X
of net charge-offs
The adequacy of the allowance for loan losses is determined on an ongoing
basis through analysis of the overall quality of the loan portfolio, historical
loan loss experience, loan delinquency trends and the economic conditions within
the company's market area. Additional allocations of the allowance are based on
specifically identified potential loss situations. These potential loss
situations are identified by account officers' evaluation of their own
portfolios as well as by an independent loan review function.
The tables below set forth an allocation of the allowance for loan losses by
category of loan and a percentage distribution of the allowance allocation. In
making the allocation, consideration was given to such factors as management's
evaluation of risk in each category, current economic conditions and charge-off
experience. An allocation of the allowance for loan losses is an estimate of the
portion of the allowance which will be used to cover future charge-offs in each
loan category, but it does not preclude any portion of the allowance allocated
to one type of loan from being used to absorb losses of another loan type.
Allocation of Allowance
for Loan Losses
December 31
In thousands 1994 1993 1992 1991 1990
Commercial $7,529 $6,870 $4,813 $3,856 $3,560
Commercial real estate 1,883 1,718 1,203 964 890
Residential real estate 977 1,358 1,720 1,318 1,217
Consumer 2,140 2,559 1,860 1,562 1,516
Total $12,529 $12,505 $9,596 $7,700 $7,183
<TABLE>
Allocation of Year-End Allowance for Loan Losses
and Percentage of Each Type of Loan to Total Loans
December 31 1994 1993 1992 1991 1990
<CAPTION>
Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial 60.1 % 27.8 % 54.9 % 31.7 % 50.2 % 30.1 % 50.1 % 34.9 % 49.6 % 35.0 %
Commercial 15.0 29.2 13.7 23.2 12.5 17.9 12.5 19.9 12.4 19.4
real estate
Residential 7.8 29.6 10.9 30.2 17.9 37.4 17.1 30.0 16.9 29.3
real estate
Consumer 17.1 13.4 20.5 14.9 19.4 14.6 20.3 15.2 21.1 16.3
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
</TABLE>
Securities, Federal Funds Sold and Resale Agreements
Securities, including those classified as held to maturity and available for
sale, increased slightly from $378 million at December 31, 1992, to $386 million
at year-end 1993, and then decreased to $314 million at December 31, 1994. TFB-
Pikeville provided an initial securities portfolio of $61 million, indicating a
net decrease of $53 million in 1993. The decline in the securities portfolio in
both 1994 and 1993 was the result of maturities, prepayments and calls. Funds
provided by the reduction in securities were utilized to fund growth in the loan
portfolio. During 1993, due to the declining interest rate environment, the
mortgage-backed securities portfolio experienced a high level of prepayments. To
a large extent, the proceeds of these prepayments were invested in commercial
and consumer loans and mortgages held for sale.
Effective December 31, 1993, the company adopted Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities. Accordingly, all debt securities in which the company does
not have the ability or management does not have the positive intent to hold to
maturity are classified as securities available for sale and are carried at
market value, as are all equity securities. Beginning December 31, 1993,
unrealized gains and losses on securities available for sale are reported as a
separate component of shareholders' equity, net of tax.
The percentage of collateralized mortgage obligations ("CMO's") and mortgage-
backed securities to total securities declined to 31% at December 31, 1994, from
39% at December 31, 1993, and 58% at December 31, 1992. This decline was due to
the significant refinancing of residential mortgages and the resulting
prepayment of mortgage-related securities, coupled with management's desire to
decrease the company's exposure to mortgage-related securities. Due to the
unpredictable nature of residential mortgage prepayments, the average and final
maturities of the related securities vary. In a rising rate environment these
securities have a longer expected life, while in a declining rate environment
they have a shorter expected life. Management limits this prepayment and payment
extension risk principally by investing in planned amortization class CMO's,
which have less volatility than other mortgage-backed securities and have an
average life of three to five years.
The tables below present the carrying value of securities for each of the past
three years and the maturities and yield
characteristics of securities as of December 31, 1994.
Carrying Value of Securities
December 31
In thousands 1994 1993 1992
U.S. Treasury and federal agencies:
Available for sale $146,484 $123,677 $51,925
Held to maturity 3,081 51,759 66,525
Collateralized mortgage obligations and mortgage-backed securities:
Available for sale 70,895 105,273 -
Held to maturity 26,372 45,660 217,575
State and municipal obligations:
Available for sale - - -
Held to maturity 49,752 42,162 28,318
Other securities:
Available for sale 12,264 11,086 -
Held to maturity 5,553 6,031 13,800
Total securities:
Available for sale 229,643 240,036 51,925
Held to maturity 84,758 145,612 326,218
Total securities $314,401 $385,648 $378,143
<TABLE>
<CAPTION>
Maturity Over Over
Distribution of
Securities
December 31, One Year Five
1994 Years
In thousands One Year Through Through Over Equity Total Market
or Less Five Ten Years Ten Years Securities Maturities Value
Years
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and federal agencies:
Available $32,902 $80,181 $40,452 $- $- $153,535 $146,484
for sale
Held to - - 3,081 - - 3,081 2,725
maturity
Collateralized mortgage obligations and mortgage-backed securities:(1)
Available 3,302 38,099 21,501 12,952 - 75,854 70,895
for sale
Held to - 3,576 6,597 16,199 - 26,372 25,418
maturity
State and municipal obligations:
Available - - - - - - -
for sale
Held to 3,797 14,010 23,279 8,666 - 49,752 47,876
maturity
Other securities:
Available - - - - 12,689 12,689 12,264
for sale
Held to 250 2,351 2,628 324 - 5,553 5,190
maturity
Total securities:
Available 36,204 118,280 61,953 12,952 12,689 242,078 229,643
for sale
Held to 4,047 19,937 35,585 25,189 - 84,758 81,209
maturity
Total $40,251 $138,217 $97,538 $38,141 $12,689 $326,836 $310,852
securities
Percent of 12.32 % 42.29 % 29.84 % 11.67 % 3.88 % 100.00 %
total
Weighted 5.16 % 5.36 % 5.56 % 6.71 % 5.96 % 5.58 %
average
yield(2)
(1) Collateralized mortgage obligations and mortgage-backed securities are
grouped into average lives based on December 1994 prepayment projections.
(2) The weighted average yields are based on amortized cost and effective yields
weighted for the scheduled maturity of each security.
</TABLE>
Federal funds sold and securities purchased under agreements to resell
declined from $68 million at December 31, 1992, to $33 million at December 31,
1993. At the end of 1994, the company was in a net federal funds purchased
position of $26 million. Average federal funds sold and resale agreements were
$13 million for 1994, $36 million for 1993 and $23 million for 1992. As with the
decline in the size of the securities portfolio, these short-term assets have
been used to fund the loan growth the company has experienced over the past two
years, as the growth in deposits has not kept pace with loan demand in the
company's markets. The unusually high balance at December 31, 1992, was
attributed to a large inflow of short-term deposits at the end of that year.
Deposits and Borrowed Funds
Total deposits averaged $1.350 billion in 1994, a 6% increase over 1993. Most
of the increase was in interest-bearing accounts, which increased $47 million,
or 4%. However, excluding TFB-Pikeville from both years, interest-bearing
accounts decreased $20 million, or 2%. Non-interest-bearing accounts increased
$23 million, or 16%, year-to-year ($14 million, or 10%, excluding TFB-
Pikeville).
Total deposits averaged $1.279 billion in 1993, an increase of $204 million,
or 19%, over 1992. Most of the increase was attributable to interest-bearing
accounts, as in 1994.
Time deposits of $100,000 or more totaled $163,646,000 at December 31, 1994,
and $168,550,000 at December 31, 1993. Interest expense on time deposits of
$100,000 or more was $6,260,000 in 1994, $6,663,000 in 1993 and $3,869,000 in
1992. The table below provides information on the maturities of time deposits of
$100,000 or more at December 31, 1994.
Maturity of Time Deposits of $100,000 or More
December 31, 1994
In thousands
Three months or less $53,544
Over three through six months 27,867
Over six through twelve months 40,287
Over twelve months 41,948
Total $163,646
Information regarding short-term borrowings is presented below.
Short-term Borrowings
Dollars in thousands
1994 1993 1992
Federal funds purchased and repurchase
agreements:
Balance at year end $74,553 $29,704 $26,993
Weighted average rate at year end 3.50% 2.38% 2.87%
Average balance during the year 40,303 28,084 26,483
Weighted average rate during the 3.11% 2.40% 3.47%
year
Maximum month-end balance 74,553 35,784 43,073
Other short-term borrowings:
Balance at year end 48,033 15,000 600
Weighted average rate at year end 6.36% 3.45% 6.00%
Average balance during the year 36,669 6,624 506
Weighted average rate during the 4.68% 3.59% 12.45%
year
Maximum month-end balance 48,840 15,000 600
Total short-term borrowings:
Balance at year end 122,586 44,704 27,593
Weighted average rate at year end 4.62% 2.74% 2.94%
Average balance during the year 76,972 34,708 26,989
Weighted average rate during the 3.86% 2.63% 3.64%
year
Maximum month-end balance 122,586 50,784 43,073
Substantially all federal funds purchased and repurchase agreements mature in
one business day. Other short-term borrowings principally represent Federal Home
Loan Bank ("FHLB") advances to TFB-TN, FSB and TFB-KY (with varying maturity
dates), which are funding residential mortgage and commercial loans.
The company has a $3 million unsecured operating line of credit with an
unaffiliated commercial bank that is used from time-to-time to supplement the
company's cash requirements. The line was not in use at December 31, 1994 or
1993.
Long-term debt averaged $40.8 million in 1994, compared with $34.0 million in
1993 and $13.1 million from 1992. The 1993 increase is the result of the
issuance of $33 million of 7.25% Subordinated Notes in a public offering during
the third quarter of 1993. The 1994 increase is due to an FHLB advance to TFB-KY
which had an original maturity exceeding one year. The advance, which was drawn
upon in order to fund fixed-rate commercial loans, was rewritten during 1994 and
reclassified as a short-term borrowing.
The company's leveraged ESOP obtained additional financing from an
unaffiliated commercial bank in 1992. Total ESOP debt was $3.7 million at
December 31, 1994, and $3.9 million at December 31, 1993.
See note 8 to the consolidated financial statements for a further description
of the terms of these borrowings.
Capital Resources and Liquidity
At December 31, 1994, the aggregate retained earnings of the banks was $52.9
million, of which $19.7 million was available for the payment of dividends to
the parent company.
The company issued on September 16, 1993, $33 million of 7.25% Subordinated
Notes in a public offering. The net proceeds were approximately $32 million, of
which $12 million was used to repay debt incurred in the TFB-Pikeville
transaction and the balance was used for general corporate purposes, including
augmenting the capital of the banks, as needed.
The company's capital ratios at December 31, 1994 and 1993 (calculated in
accordance with regulatory guidelines) were as follows:
December 31 1994 1993
Tier 1 risk based 9.50% 9.37%
Regulatory minimum 4.00 4.00
Total risk based 13.35 13.51
Regulatory minimum 8.00 8.00
Leverage 6.97 6.48
Regulatory minimum 3.00 3.00
Capital ratios of all of the company's subsidiaries are in excess of
applicable minimum regulatory capital ratio requirements at December 31, 1994.
The increase in equity capital during 1993 and 1994 was nearly all provided by
retained earnings and common stock issued in connection with the company's
Dividend Reinvestment and Stock Purchase Plan, offset in 1994 by an unrealized
loss on the portfolio of securities available for sale.
Generally speaking, the company relies upon net inflows of cash from financing
activities, supplemented by net inflows of cash from operating activities, to
provide cash used in its investing activities. As is typical of most banking
companies, significant financing activities include issuance of common stock and
long-term debt, deposit gathering, and the use of short-term borrowing
facilities, such as federal funds purchased, repurchase agreements, FHLB
advances and lines of credit. The company's primary investing activities include
purchases of securities and loan originations, offset by maturities, prepayments
and sales of securities, and loan payments.
Asset/Liability Management
Managing interest rate risk is fundamental to the financial services industry.
The company manages the inherently different maturity and repricing
characteristics of the lending and deposit acquisition lines of business to
achieve a desired interest sensitivity position and to limit exposure to
interest rate risk. The maturity and repricing characteristics of the company's
lending and deposit activities create a naturally asset-sensitive structure. By
using a combination of on- and off-balance-sheet financial instruments, the
company manages interest rate sensitivity within established policy guidelines.
The company's Asset/Liability Committee approves policy guidelines, provides
oversight to the asset/liability management process, and monitors and adjusts
exposure to interest rates in response to loan and deposit flows.
Asset/liability activity is reviewed monthly by the company's board of
directors.
An earnings simulation model is used to monitor and evaluate the exposure and
impact of changing interest rates on earnings. In today's interest rate
environment, which includes a complex array of both on- and off-balance-sheet
financial instruments, traditional static interest rate gap tables do not
provide the most comprehensive and informative disclosures about interest-rate
risks. The simulation model used by the company reflects the dynamics of all
interest-earning assets, interest-bearing liabilities and off-balance-sheet
financial instruments. It combines the various factors affecting rate
sensitivity into a two-year earnings outlook that incorporates management's view
of the most likely interest rate environment. The model is updated at least
monthly for multiple interest rate scenarios, projected changes in balance sheet
categories and other relevant assumptions. In developing multiple rate
scenarios, an econometric model is employed to forecast key rates, based on the
cyclical nature of those rates, with a probability assigned to potential future
events which might affect those rates.
Among the factors the model utilizes which traditional interest rate gap
tables do not are rate of change differentials, such as federal funds rates
versus savings account rates, maturity effects, such as calls on securities, and
rate barrier effects, such as caps or floors on loans. It also captures changing
balance sheet levels, such as loans and investment securities, and floating rate
loans that may be tied or related to prime, treasury notes, CD rates or other
rate indices, which do not necessarily move identically as rates change. In
addition, it captures leads and lags that occur as rates move away from current
levels, and the effects of prepayments on various fixed rate assets such as
residential mortgages, mortgage-backed securities and consumer loans. These, and
certain other effects, are evaluated to develop multiple scenarios from which
the sensitivity of earnings to changes in interest rates is determined.
The following illustrates the effects on net interest income of multiple rate
environments compared to the rate environment of December 1994 (the "flat"
scenario). For example, in the scenario considered "most likely" the company
assumed that the federal funds rate and prime rate would be 6.00% and 9.00%,
respectively, at the end of 1995, and would be slightly higher for ten of the
twelve months from December 31, 1994 to December 31, 1995.
Flat Most Likely Rising Declining
Assumptions:
Federal funds rate, December 1995 5.50% 6.00% 8.00% 4.75%
Prime rate, December 1995 8.50% 9.00% 11.00% 7.75%
Increase (decrease) in net
interest income -0-% 4.86% 7.85% (0.31)%
Management concludes that the company is asset sensitive at December 31, 1994,
which indicates that net interest income is expected to be positively impacted
during a period of rising interest rates; however a uniform period of decreasing
rates would adversely impact the company. It should be noted, however, these
results do not take into account any future actions which could be undertaken to
reduce an adverse impact if there were a change in interest rate expectations or
in the actual level of interest rates.
<TABLE>
Quarterly Results of Operations
<CAPTION>
In thousands, 1994 1993
except per share
data
4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $30,294 $28,926 $28,137 $26,625 $27,565 $27,245 $24,071 $23,938
Interest expense 12,703 11,972 11,467 11,233 11,680 11,535 10,306 10,729
Net interest 17,591 16,954 16,670 15,392 15,885 15,710 13,765 13,209
income
Provision for loan 645 555 574 438 588 786 734 686
losses
Net interest 16,946 16,399 16,096 14,954 15,297 14,924 13,031 12,523
income after
provision
Non-interest 4,941 4,274 3,867 4,088 4,681 4,258 3,480 4,613
income
Non-interest 15,873 14,996 14,900 14,301 15,628 13,985 11,903 11,314
expenses
Income before
income taxes and
cumulative
effect of change
in accounting 6,014 5,677 5,063 4,741 4,350 5,197 4,608 5,822
principle
Income tax expense 1,963 1,870 1,638 1,604 1,494 1,648 1,428 1,653
Income before
cumulative effect
of change in 4,051 3,807 3,425 3,137 2,856 3,549 3,180 4,169
accounting
principle
Cumulative effect
of change in
accounting - - - - - - - 296
principle
Net income $4,051 $3,807 $3,425 $3,137 $2,856 $3,549 $3,180 $4,465
Net income $4,051 $3,793 $3,405 $3,117 $2,836 $3,528 $3,161 $4,444
applicable to
common stock
Earnings per $0.36 $0.34 $0.30 $0.28 $0.25 $0.31 $0.28 $0.40
common share
</TABLE>
<TABLE>
Consolidated Statistical
Information (1)(2)
For the years ended December 31
Dollars in thousands, except
per share data
<CAPTION>
1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
Interest income $113,982 $102,819 $95,343 $79,727 $74,800
Interest expense 47,375 44,250 46,763 46,819 45,989
Net interest income 66,607 58,569 48,580 32,908 28,811
Provision for loan losses 2,212 2,794 2,618 2,242 3,415
Net interest income after 64,395 55,775 45,962 30,666 25,396
provision for loan losses
Non-interest income 17,170 17,032 13,793 9,237 7,517
Non-interest expenses 60,070 52,830 39,890 29,228 24,830
Income before income taxes and
cumulative
effect of change in 21,495 19,977 19,865 10,675 8,083
accounting principle
Income tax expense 7,075 6,223 6,400 3,083 2,003
Income before cumulative effect
of change in accounting 14,420 13,754 13,465 7,592 6,080
principle
Cumulative effect of change in - 296 - - -
accounting principle
Net income $14,420 $14,050 $13,465 $7,592 $6,080
Net income applicable to common $14,366 $13,969 $13,328 $7,198 $5,762
stock
Per common share:(3)
Primary earnings per share $1.28 $1.24 $1.25 $1.03 $0.89
Fully-diluted earnings per 1.28 1.24 1.25 0.99 0.86
share
Common shareholders' equity 9.96 9.96 9.01 7.78 6.81
at year end
Cash dividends declared 0.56 0.51 0.44 0.36 0.34
At year end:
Total assets 1,617,835 1,597,453 1,380,626 976,405 843,614
Total loans, net of unearned 1,143,716 1,006,796 780,846 567,954 538,518
income
Total deposits 1,335,509 1,376,227 1,222,050 857,663 732,723
Long-term debt 37,334 54,217 21,957 18,958 28,541
Total shareholders' equity 111,632 112,036 99,406 66,172 50,796
Common shareholders' equity 111,632 111,026 98,396 62,877 42,991
Allowance for loan losses 12,529 12,505 9,596 7,700 7,183
Selected ratios:
Return on average assets 0.91 % 0.96 % 1.10 % 0.86 % 0.78 %
Return on average 12.89 13.24 14.56 13.65 12.85
shareholders' equity
Return on average common 12.92 13.29 14.57 14.64 13.68
shareholders' equity
Average shareholders' equity 7.05 7.25 7.58 6.31 6.10
to average total assets
Leverage ratio 6.97 6.48 6.57 5.99 5.14
Tier 1 risk-based capital 9.50 9.37 11.05 9.21 7.60
ratio
Total risk-based capital 13.35 13.51 12.51 11.58 10.32
ratio
Common dividend payout ratio 43.88 41.05 35.10 35.03 38.35
Allowance for loan losses as
a percentage
of year-end loans 1.10 1.24 1.23 1.36 1.33
Nonperforming loans as a
percentage
of year-end loans 0.69 0.98 1.15 1.87 1.74
Net charge-offs as a 0.20 0.26 0.24 0.31 0.52
percentage of average loans
Net interest margin 4.57 4.32 4.31 4.04 4.04
Other data:
Number of full-time 836 829 672 473 422
equivalent employees at year end
Number of common shareholders 1,907
of record at year end
(1) During 1993, 1992, 1991 and 1990, the company acquired one commercial bank,
three thrift institutions and certain branches of two other thrift institutions
in transactions accounted for using the purchase method of accounting. Financial
data pertaining to the acquired entities since the acquisition dates has been
included in the consolidated financial statements. See note 3 to the
consolidated financial statements.
(2) In 1994 and 1992, the company merged with four bank holding companies in
transactions accounted for using the pooling-of-interests method of accounting.
Accordingly, all financial data has been restated as if the entities were
combined for all periods presented. See note 3 to the consolidated financial
statements.
(3) All per common share data has been adjusted to reflect the 4-for-3 stock
splits effected December 18, 1992, and December 16, 1991.
</TABLE>
<PAGE>
Independent Auditors' Report
We have audited the accompanying consolidated balance sheets of Trans
Financial Bancorp, Inc. and subsidiaries as of December 31, 1994 and 1993, and
the related consolidated statements of income, changes in shareholders' equity
and cash flows for each of the years in the three-year period ended December 31,
1994. These consolidated financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Trans
Financial Bancorp, Inc., and subsidiaries as of December 31, 1994 and 1993, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1994, in conformity with generally
accepted accounting principles.
As discussed in note 1 to the consolidated financial statements, in 1993 the
company adopted the provisions of the Financial Accounting Standards Board's
Statements of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" and No. 115, "Accounting for Certain Investments in Debt and Equity
Securities."
KPMG PEAT MARWICK LLP
Louisville, Kentucky
January 16, 1995
<PAGE>
Trans Financial Bancorp, Inc.
Consolidated Balance Sheets
December 31 - In thousands, except share data
1994 1993
Assets
Cash and due from banks (note 4) $80,828 $68,533
Interest-bearing deposits with banks 197 447
Federal funds sold and
resale agreements - 32,778
Mortgage loans held for sale 6,541 45,178
Securities available for sale (amortized cost
of $242,079 as of December 31, 1994, and
$238,861 as of December 31, 1993) (note 5) 229,643 240,036
Securities held to maturity (market value
of $81,209 as of December 31, 1994, and
$148,931 as of December 31, 1993) (note 5) 84,758 145,612
Loans, net of unearned income (notes 6 and 8) 1,143,716 1,006,796
Less allowance for loan losses 12,529 12,505
Net loans 1,131,187 994,291
Premises and equipment, net (note 7) 36,440 33,393
Other assets (note 3) 48,241 37,185
Total assets
$1,617,835 $1,597,453
Liabilities and Shareholders' Equity
Deposits:
Non-interest bearing $192,433 $169,828
Interest bearing 1,143,076 1,206,399
Total deposits 1,335,509 1,376,227
Federal funds purchased and
repurchase agreements 74,553 29,704
Other short-term borrowings (note 8) 48,033 15,000
Long-term debt (note 8) 37,334 54,217
Other liabilities 10,774 10,269
Total liabilities 1,506,203 1,485,417
Commitments and contingencies (notes 3, 12 and
13)
Shareholders' equity:
Preferred stock (note 9) - 1,010
Common stock, no par value. Authorized
25,000,000 shares; issued and
outstanding 11,203,247 and
11,149,722 shares, respectively 21,006 20,906
Additional paid-in capital 42,810 42,256
Retained earnings (note 10) 59,587 51,006
Unrealized net gain (loss) on
securities available for sale,
net of tax (note 5) (8,073) 719
Employee Stock Ownership Plan shares
purchased with debt (notes 8 and 12) (3,698) (3,861)
Total shareholders' equity 111,632 112,036
Total liabilities and shareholders' equity
$1,617,835 $1,597,453
See accompanying notes to consolidated financial
statements.
Trans Financial Bancorp, Inc.
Consolidated Statements of Income
Years Ended December 31
In thousands, except per share data 1994 1993 1992
Interest income
Loans, including fees $94,020 $78,812 $68,683
Federal funds sold and resale
agreements 540 976 867
U.S. Treasury and federal agency 15,444 19,856 22,737
securities
State and municipal obligations 2,770 2,211 1,941
Other securities 1,104 844 809
Interest-bearing deposits with banks 104 120 306
Total interest income 113,982 102,819 95,343
Interest expense
Deposits 41,724 41,486 44,745
Federal funds purchased
and repurchase agreements 1,253 673 919
Long-term debt and other
borrowings (note 8) 4,398 2,091 1,099
Total interest expense 47,375 44,250 46,763
Net interest income 66,607 58,569 48,580
Provision for loan losses (note 6) 2,212 2,794 2,618
Net interest income after
provision for loan losses 64,395 55,775 45,962
Non-interest income
Service charges on deposit accounts 7,384 6,351 4,954
Loan servicing fees 2,952 2,183 1,519
Gains on sales of securities, net 257 1,149 890
(note 5)
Gains (losses) on sales of mortgage
loans held for sale, net (200) 949 1,366
Trust services 1,247 1,133 943
Brokerage income 1,305 849 644
Other 4,225 4,418 3,477
Total non-interest income 17,170 17,032 13,793
Non-interest expenses
Compensation and benefits (note 12) 26,330 23,218 17,838
Net occupancy expense 4,572 4,071 3,012
Furniture and equipment expense 5,284 4,243 3,205
Deposit insurance 3,183 2,778 2,365
Professional fees 3,742 2,418 1,749
Postage, printing & supplies 3,516 2,957 2,327
Communications 1,131 1,024 690
Other 12,312 12,121 8,704
Total non-interest expenses 60,070 52,830 39,890
Income before income taxes and
cumulative effect of change
in accounting principle 21,495 19,977 19,865
Income tax expense (note 11) 7,075 6,223 6,400
Income before cumulative effect
of change in accounting principle 14,420 13,754 13,465
Cumulative effect of change in
accounting principle (note 11) - 296 -
Net income $14,420 $14,050 $13,465
Net income applicable
to common stock $14,366 $13,969 $13,328
Primary earnings per common share
(note 1):
Before cumulative effect of change
in accounting principle $1.28 $1.22 $1.25
Based on net income applicable to 1.28 1.24 1.25
common stock
Fully-diluted earnings per common
share (note 1):
Before cumulative effect of change
in accounting principle $1.28 $1.22 $1.25
Based on net income applicable to 1.28 1.24 1.25
common stock
See accompanying notes to consolidated
financial statements.
<PAGE>
Trans Financial Bancorp, Inc.
Consolidated Statements of Changes in Shareholders' Equity
In thousands, except share and per share data
Preferred Stock Common Stock Additional
Number Number Paid-in
of shares Amount of shares Amount Capital
Balance, December
31, 1991,
as previously 14,077 $2,285 3,401,494 $8,493 $15,905
reported
Adjustments for
acquisitions
accounted
for using the
pooling-of-
interests
method of
accounting (note
3):
Kentucky 1,022,756 2,557 (394)
Community Bancorp,
Inc.
Peoples 847,903 2,120 3,019
Financial Services,
Inc.
FGC Holding 1,010 1,010 787,500 1,969 (469)
Company
Balance, December
31, 1991,
as restated 15,087 $3,295 6,059,653 $15,139 $18,061
Net income for the
year
Cash dividends
declared:
Common stock,
$.44 per share
Preferred stock
Redemption of
preferred stock:
Class A, 1990 (333) (999)
Series
Other (13,744) (1,286)
Common stock 1,265,000 3,172 13,944
issued in public
offering
Common stock
issued in
connection
with business
combination
accounted
for as a 412,389 1,031 4,984
purchase (note 3)
Stock options 1,914 5 15
exercised
Common stock
issued in
connection
with dividend
reinvestment and
stock
purchase plans 37,102 93 498
and other issuances
Conversion of 415,462 1,039 3,411
debentures
Increase in
unrealized loss
on marketable
equity securities
ESOP shares - - - - -
purchased with debt
Balance, December 1,010 $1,010 8,191,520 $20,479 $40,913
31, 1992
Net income for the
year
Cash dividends
declared:
Common stock,
$.51 per share
Preferred stock
Stock options 8,577 16 36
exercised
Common stock
issued in
connection
with dividend
reinvestment and
stock
purchase plans 47,613 89 738
and other issuances
Four-for-three 2,730,025 (6)
stock split
Common stock 171,738 322 572
issued in public
offering
Decrease in
unrealized loss
on marketable
equity securities
Net unrealized
gain on securities
available for
sale, net of tax
ESOP debt
reduction
Reissue treasury - - 249 - 3
stock
Balance, December 1,010 $1,010 11,149,722 $20,906 $42,256
31, 1993
Net income for the
year
Cash dividends
declared:
Common stock,
$.56 per share
Preferred stock
Redemption of (1,010) (1,010)
preferred stock
Stock options 22,018 41 178
exercised
Common stock
issued in
connection
with dividend
reinvestment and
stock
purchase plan 31,507 59 376
and other issuances
Net unrealized
loss on securities
available for
sale, net of tax
ESOP debt - - - - -
reduction, net
Balance, December - $- 11,203,247 $21,006 $42,810
31, 1994
See accompanying notes to consolidated financial statements.
<PAGE>
Trans Financial Bancorp, Inc.
Consolidated Statements of Changes in Shareholders' Equity
In thousands, except share Unrealized
and per share data Net Gain Employee
Unrealized (Loss) on Stock
Loss on Securities Ownership
Marketable Available Plan Shares
Retained Equity for Sale , Purchased
Earnings Securities Net of Tax With Debt Total
Balance,
December 31,
1991,
as previously $15,169 $(114) $- $(1,205) $40,533
reported
Adjustments for
acquisitions
accounted
for using the
pooling-of-
interests
method of
accounting (note
3):
Kentucky 8,586 (47) 10,702
Community
Bancorp, Inc.
Peoples 2,777 7,916
Financial
Services, Inc.
FGC Holding 4,509 - - - 7,019
Company
Balance,
December 31,
1991,
as restated $31,041 $(161) $- $(1,205) $66,170
Net income for 13,465 13,465
the year
Cash dividends
declared:
Common stock, (3,330) (3,330)
$.44 per share
Preferred (137) (137)
stock
Redemption of
preferred stock:
Class A, 1990 (999)
Series
Other (1,286)
Common stock 17,116
issued in public
offering
Common stock
issued in
connection
with business
combination
accounted
for as a 6,015
purchase (note
3)
Stock options 20
exercised
Common stock
issued in
connection
with dividend
reinvestment and
stock
purchase 591
plans and other
issuances
Conversion of 4,450
debentures
Increase in
unrealized loss
on marketable (2) (2)
equity
securities
ESOP shares - - - (2,667) (2,667)
purchased with
debt
Balance, $41,039 $(163) $- $(3,872) $99,406
December 31,
1992
Net income for 14,050 14,050
the year
Cash dividends
declared:
Common stock, (4,002) (4,002)
$.51 per share
Preferred (81) (81)
stock
Stock options 52
exercised
Common stock
issued in
connection
with dividend
reinvestment and
stock
purchase 827
plans and other
issuances
Four-for-three (6)
stock split
Common stock 894
issued in public
offering
Decrease in
unrealized loss
on marketable 163 163
equity
securities
Net unrealized
gain on
securities
available for 719 719
sale, net of tax
ESOP debt 11 11
reduction
Reissue - - - - 3
treasury stock
Balance, $51,006 $- $719 $(3,861) $112,036
December 31,
1993
Net income for 14,420 14,420
the year
Cash dividends
declared:
Common stock, (5,785) (5,785)
$.56 per share
Preferred (54) (54)
stock
Redemption of (1,010)
preferred stock
Stock options 219
exercised
Common stock
issued in
connection
with dividend
reinvestment and
stock
purchase plan 435
and other
issuances
Net unrealized
loss on
securities
available for (8,792) (8,792)
sale, net of tax
ESOP debt - - - 163 163
reduction, net
Balance, $59,587 $- $(8,073) $(3,698) $111,632
December 31,
1994
See accompanying notes to consolidated financial statements.
<PAGE>
Trans Financial Bancorp, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31
In thousands 1994 1993 1992
Cash flows from operating activities:
Net income $14,420 $14,050 $13,465
Adjustments to reconcile net income to
cash
provided by operating activities:
Provision for loan losses 2,212 2,794 2,618
Deferred tax expense (882) (522) (152)
Gains on sales of securities:
Available for sale (257) (1,149) -
Held to maturity - - (890)
Loss (gains) on sales of mortgage 200 (949) (1,366)
loans
Loss (gains) on sale of premises (231) 14 (12)
and equipment
Depreciation and amortization of 5,032 3,466 2,582
fixed assets
Amortization of intangible assets 1,087 1.085 688
Amortization of premium
on securities and loans, net 2,094 2,090 668
Increase in accrued interest (1,593) (1,370) (1,118)
receivable
Decrease (increase) in other assets (9,924) 2,170 2,776
Increase (decrease) in accrued 114 (449) (244)
interest payable
Increase (decrease) in other 4,197 (2,331) (3,703)
liabilities
Sale of mortgage loans held for sale 133,598 201,840 128,267
Originations of mortgage loans held (95,161) (221,072) (123,729)
for sale
Net cash provided by (used in) 54,906 (333) 19,850
operating activities
Cash flows from investing activities:
Net decrease in interest-bearing
deposits
with banks 250 8,460 13,658
Net decrease (increase) in federal
funds sold
and resale agreements 32,778 36,888 (44,384)
Proceeds from sales of securities:
Available for sale 5,183 23,787 8,226
Held to maturity - - 47,928
Proceeds from prepayment and call of
securities:
Available for sale 50,975 3,872 -
Held to maturity 12,363 111,270 75,937
Proceeds from maturities of
securities:
Available for sale 20,412 12,920 -
Held to maturity 9,492 44,854 37,990
Purchases of securities:
Available for sale (21,566) (49,965) (2,522)
Held to maturity (20,047) (94,514) (196,896)
Net increase in loans (140,434) (117,798) (56,540)
Proceeds from sales of foreclosed 1,950 2,949 1,302
assets
Purchases of premises and equipment (9,785) (5,423) (6,625)
Proceeds from disposals of premises 1,569 112 635
and equipment
Net cash and cash equivalents inflow
(outflow)
from acquisitions (note 3) - (7,996) 39,835
Net cash provided by investing (56,860) (30,584) (81,456)
activities
Cash flows from financing activities:
Net increase (decrease) in deposits (40,718) (9,707) 56,708
Net increase (decrease) in federal
funds purchased
and repurchase agreements 44,849 (431) 4,111
Net increase (decrease) in other short- 23,033 14,400 (1,987)
term borrowings
Proceeds from issuance of long-term - 36,603 11,938
debt
Repayment of long-term debt (6,720) (4,332) (6,121)
Proceeds from issuance of common stock 654 1,770 17,727
Redemption of preferred stock (1,010) - (2,285)
Dividends paid (5,839) (4,083) (3,467)
Net cash provided by (used in) 14,249 34,220 76,624
financing activities
Net increase in cash and cash 12,295 3,303 15,018
equivalents
Cash and cash equivalents at beginning 68,533 65,230 50,212
of year
Cash and cash equivalents at end of $80,828 $68,533 $65,230
year (note 2)
See accompanying notes to consolidated
financial statements.
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. A description of the more significant
accounting policies follows.
Basis of Presentation
The consolidated financial statements give retroactive effect to the merger of
Trans Financial Bancorp, Inc. ("the company") with Kentucky Community Bancorp,
Inc. on February 15, 1994, Peoples Financial Services, Inc. on April 22, 1994,
and FGC Holding Company on August 31, 1994 each of which has been accounted for
as a pooling of interests, as described in note 3 to the consolidated financial
statements.
Principles of Consolidation
The consolidated financial statements include the accounts of Trans Financial
Bancorp, Inc. and its subsidiaries, all of which are wholly owned. The company's
principal subsidiaries are: Trans Financial Bank, National Association; Trans
Financial Bank; Trans Financial Bank Tennessee, National Association; Trans
Financial Bank of Martin, National Association; Trans Financial Bank of
Tennessee, F.S.B.; and Trans Financial Bank, Federal Savings Bank. Collectively,
these six institutions are referred to in this report as "the banks." In
addition, the company has a securities broker/dealer, Trans Financial Investment
Services, Inc.; a mortgage banking company, Trans Financial Mortgage Company;
and a travel agency, Trans Travel Agency, Inc.
Significant intercompany transactions and accounts have been eliminated in
consolidation. Certain prior year amounts have been reclassified to conform with
1994 presentations.
Securities
Effective December 31, 1993, the company adopted Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities. Accordingly, all debt securities in which the company does
not have the ability or management does not have the positive intent to hold to
maturity are classified as securities available for sale and are carried at
market value. All equity securities are classified as available for sale
beginning December 31, 1993. Unrealized gains and losses on securities available
for sale are reported as a separate component of shareholders' equity (net of
income taxes) beginning December 31, 1993. Securities classified as available
for sale prior to December 31, 1993, are reported at the lower of aggregate cost
or market value. Securities classified as held to maturity are carried at
amortized cost. The company has no securities classified as trading securities.
Amortization of premiums and accretion of discounts are recorded by a method
which approximates a level yield and which, in the case of mortgage-backed
securities, considers prepayment risk. The specific identification method is
used to determine the cost of securities sold.
Loans
Loans are stated at the unpaid principal balance. Interest income on loans is
recorded on the accrual basis except for those loans in a nonaccrual income
status. Loans are placed in nonaccrual status when principal or interest is past
due 90 days or more and the loan is not adequately collateralized and in the
process of collection, or when, in the opinion of management, principal or
interest is not likely to be paid in accordance with the terms of the
obligation. Loans are not reclassified as accruing until principal and interest
payments are brought current and future payments appear reasonably certain.
Unearned income, arising principally from consumer installment loans or the
deferral of certain loan fees, is recognized as income using a method that
approximates the interest method.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level that adequately
provides for estimated losses in the loan portfolio. The level of the allowance
is based on an evaluation of the loan portfolio which includes reviews of
individual credits, consideration of past loan loss experience, loan delinquency
trends, changes in the composition of the loan portfolio and the impact of
current and anticipated future economic conditions. The allowance for loan
losses is increased by the provision for loan losses and reduced by net
charge-offs. The level of the allowance and the amount of the provision for loan
losses involve uncertainties and matters of judgment and therefore, cannot be
determined with precision.
Mortgage Loans Held for Sale
Mortgage loans held for sale are carried at the lower of aggregate cost or
market value, as determined by outstanding loan commitments from investors or
current yield requirements. Gain or loss is recorded at the time of sale in an
amount reflecting the difference between the contractual interest rates of the
loans sold and the current market rate.
Interest Rate Swaps
The company uses interest rate swaps to manage its sensitivity to interest
rate risk. For interest-rate-risk swaps, interest income and expense is accrued
over the terms of the agreements, and transaction fees are deferred and
amortized through interest income and expense over the terms of the agreements.
The fair market value of these instruments is not included in the financial
statements.
Premises and Equipment
Premises and equipment are carried at cost, less accumulated depreciation and
amortization. Depreciation of premises and equipment is computed using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are amortized on the straight-line method over the term of the
related lease or over the useful life of the improvements, whichever is shorter.
Leasing commitments are insignificant.
Purchased Mortgage Servicing Rights and Excess Service Fees
The cost of purchased mortgage loan servicing rights ("PMSR's") ($9,166,000
and $3,050,000 at December 31, 1994 and 1993, respectively, net of accumulated
amortization), which is included in other assets, is amortized against service
fee income in proportion to, and over the period of, estimated net servicing
revenues.
The carrying value of PMSR's and the related amortization are periodically
evaluated using a discounted valuation method, in relation to estimated future
net servicing revenues. The company evaluates the carrying value of the PMSR's
by estimating the future net servicing income of the rights based on
management's best estimate of remaining loan lives.
The normal agency (GNMA, FNMA or FHLMC) servicing fee is used in the
capitalization of any excess service fees. When participating interests in loans
sold have an average contractual interest rate, as adjusted for normal servicing
costs, which differs from the agreed yield to the purchaser, gains or losses are
recognized equal to the present value of such differential over the estimated
remaining life of such loans. Amortization of capitalized excess servicing fees
is reflected as a reduction of loan servicing income using the interest method
over the estimated remaining life of such loans, adjusted for actual
prepayments.
Other Assets
Included in other assets is real estate acquired in settlement of loans and
loans classified as in-substance foreclosures, which are carried at the lower of
cost or fair value less estimated selling costs. The excess of cost over fair
value less estimated costs to sell at the time of foreclosure is charged to the
allowance for loan losses. Provisions for subsequent declines in fair value are
included in other non-interest expense. Other costs relating to holding real
estate acquired in settlement of loans and in-substance foreclosures are charged
to other non-interest expense as incurred. Costs related to real estate in the
process of development are capitalized.
Income Taxes
The company adopted as of January 1, 1993, Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes. Under this statement, a current
or deferred income tax liability is recognized, subject to certain limitations,
for the current or deferred tax consequences of all events that have been
recognized in the financial statements. The deferred income tax liability or
asset is measured by the provisions of enacted tax laws. Income taxes for prior
years were determined in accordance with Accounting Principles Board Opinion No.
11. The cumulative effect of this change in accounting principle, determined as
of January 1, 1993, is reported separately in the consolidated statement of
income for the year ended December 31, 1993.
Earnings Per Common Share
Primary earnings per share is computed by dividing net income applicable to
common stock by the weighted average number of shares of common stock and common
stock equivalents outstanding during the period. Fully diluted earnings per
share is computed based on the weighted average number of shares of common stock
and common stock equivalents outstanding during the period, with common stock
equivalents calculated based on the ending market price, if higher than the
average market price. Net income applicable to common stock is net income
reduced by dividends on preferred stock.
The weighted average number of shares outstanding after giving effect to these
stock splits were as follows:
In thousands 1994 1993 1992
Primary 11,258 11,245 10,633
Fully diluted 11,258 11,245 10,633
(2) Statement of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand and amounts due from banks.
The following summarizes supplemental cash flow data for the years ended
December 31, 1994, 1993 and 1992:
In thousands 1994 1993 1992
Cash paid for interest $47,261 $44,309 $47,225
Cash paid for income taxes 8,537 7,163 6,609
Certain non-cash investing and financing transactions are summarized as
follows:
Conversion of debentures $ - $ - $4,450
Issuance of stock in business combination - - 6,015
Decrease in unrealized loss on marketable
equity securities - - 2
Change in unrealized gain (loss) on
securities available for sale,
net of tax (8,792) 882 -
Debt reductions (increases) of Employee
Stock Ownership Plan (net) 163 11 (2,667)
Loans transferred to other real estate
and other foreclosed assets 1,326 1,019 4,834
Other assets transferred to loans - 274 -
Investment securities transferred to
securities available for sale:
Upon adoption of SFAS No. 115 - 171,530 -
Related to business combinations 58,641 - -
Other transfers - 7,359 53,900
Reclassification of debt from long-term
to short-term 10,000 - -
(3) Business Combinations
Combinations Consummated through December 31, 1994
On February 15, 1994, Trans Financial merged with Kentucky Community Bancorp,
Inc. ("KCB") of Maysville, Kentucky, the holding company for The State National
Bank, Peoples First Bank, and Farmers Liberty Bank. As of the date of
consummation, KCB had consolidated assets of approximately $175 million, year-to
date net interest income of approximately $915 thousand, and year-to-date net
income of approximately $325 thousand. Under the terms of the merger the shares
of KCB common stock outstanding were converted into 1,374,962 shares of common
stock of the company.
On April 22, 1994, Trans Financial merged with Peoples Financial Services,
Inc. ("PFS") of Cookeville, Tennessee, the holding company for Peoples Bank and
Trust of the Cumberlands and Citizens Federal Savings Bank. As of the date of
consummation, PFS had consolidated assets of approximately $123 million, year-
to-date net interest income of approximately $1,520 thousand, and year-to-date
net income of approximately $330 thousand. Under the terms of the merger, the
shares of PFS common stock were converted into 1,302,254 shares of common stock
of the company.
On August 31, 1994, Trans Financial merged with FGC Holding Company ("FGC"),
of Martin, Kentucky, the holding company for First Guaranty National Bank. As of
the date of consummation, FGC had consolidated assets of approximately $127
million, year-to-date net interest income of approximately $3,420 thousand, and
year-to-date net income of approximately $1,290 thousand. Under the terms of the
merger, the shares of FGC common stock were converted into 1,050,000 shares of
common stock of the company and the shares of FGC preferred stock were retired.
The consolidated financial statements of the company give effect to these
three mergers, each of which has been accounted for as a pooling of interests.
Accordingly, financial statements for all periods have been restated to reflect
the results of operations of these companies on a combined basis from the
earliest period presented, except for dividends per share. Certain
reclassifications of the historical results of these companies have been made to
conform to the current presentation. There were no material intercompany
transactions and no material differences in accounting policies and procedures.
The company's consolidated financial data for the years ended December 31, 1993
and 1992 has been restated as follows:
In thousands, except per share data
Trans
Year ended December 31, 1993 Financial KCB PFS FGC Restated
Net interest income $40,586 $7,240 $5,230 $5,513 $58,569
Provision for loan losses 1,662 441 241 450 2,794
Net income 9,316 964 1,847 1,923 14,050
Fully diluted earnings per
common share $1.24 $1.24
Year ended December 31, 1992
Net interest income $31,396 $7,202 $4,762 $5,220 $48,580
Provision for loan losses 1,216 838 264 300 2,618
Net income 9,060 1,349 1,229 1,827 13,465
Fully diluted earnings per
common share $1.30 $1.25
On July 6, 1993, Trans Financial acquired all of the outstanding stock of
Trans Kentucky Bancorp, Inc., the holding company for The Citizens Bank of
Pikeville, now Trans Financial Bank. The aggregate costs, including consider
ation and acquisition costs were approximately $19 million. The excess of the
costs over the fair value of net assets acquired of $117,000 was recorded as
goodwill. This acquisition has been accounted for using the purchase method of
accounting and, accordingly, the results of operations and cash flows of this
entity have been included in the consolidated financial statements since the
date of acquisition.
On February 1, 1993, PFS sold 31,225 shares (equivalent to 171,738 shares of
common stock of the company, based on the exchange ratio of 5.5 shares of common
stock of the company for each share of PFS common stock) of newly-issued common
stock in connection with its acquisition of Citizens Federal Savings Bank,
Rockwood, Tennessee, ("Citizens") pursuant to a definitive agreement entered
into by PFS and Citizens in May, 1992. In connection with the acquisition, PFS
and Citizens adopted a Plan of Conversion/Acquisition ("Plan") whereby Citizens
was converted from a federally-chartered mutual institution to a federally-
chartered stock institution. Pursuant to the Plan, shares of capital stock of
PFS were offered initially for subscriptions to eligible members of Citizens and
to certain other persons as of specified dates and subject to various
subscription priorities as provided by the Plan. The capital stock was offered
at a price determined by PFS's Board of Directors based upon an appraisal made
by an independent appraisal firm. The offering raised gross proceeds of
approximately $1,405,000, all of which was used in the acquisition of Citizens.
PFS incurred costs of $511,000 associated with the offering. All costs incurred
associated with the sale of stock and acquisition were deducted from the
proceeds of the sale of stock. The transaction was accounted for as a pooling of
interests and, accordingly, all financial data has been restated as if the
entities were combined for all periods presented.
On March 26, 1992, the company acquired First Federal Savings Bank of
Tennessee and its wholly-owned subsidiaries, now Trans Financial Bank of
Tennessee, F.S.B., for cash and common stock of the company. The aggregate
costs, including consideration and acquisition costs, were $11,270 thousand. The
412,389 shares of common stock issued were valued at $6.0 million. The excess of
costs over the fair value of net assets acquired of $17,000 was recorded as
goodwill.
On March 27, 1992, the company acquired Maury Federal Savings Bank for cash of
$10,989 thousand. Aggregate consideration and acquisition costs totaled $11,110
thousand. The excess of the fair value of net assets over costs of $468,000 was
allocated to reduce the values assigned to premises and equipment. On November
27, 1992, this entity was merged with Trans Financial Bank of Tennessee, F.S.B.
These two acquisitions have been accounted for using the purchase method of
accounting and, accordingly, the results of operations and cash flows of these
two entities have been included in the consolidated financial statements since
the dates of acquisition.
On August 7, 1992, the company acquired five middle Tennessee branches of
Heritage Federal Bank for Savings. In this transaction the company's
wholly-owned subsidiary, Trans Financial Bank of Tennessee, F.S.B., assumed
approximately $55 million in deposits, acquired approximately $2.3 million in
premises and equipment, and received approximately $52 million in cash, net of
an $800 thousand premium.
On December 31, 1992, the company merged with Dawson Springs Bancorp, Inc.
("DSB"), the holding company for Kentucky State Bank and Commercial Bank of
Dawson. Under the terms of the merger all shares of DSB common stock outstanding
were converted into 560,088 shares of Trans Financial Bancorp, Inc. common
stock. The transaction was accounted for as a pooling of interests and,
accordingly, all financial data has been restated as if the entities were
combined for all periods presented. On December 31, 1992 these banks were merged
into Trans Financial Bank, National Association.
Intangibles (goodwill and deposit base premium) from the above transactions,
as well as acquisitions consummated in prior years, are being amortized over
periods ranging from ten to twenty years using straight-line and accelerated
methods and had a combined unamortized balance of $7,409,000 and $8,373,000 at
December 31, 1994 and 1993, respectively.
Pending Business Combination
On November 16, 1994, the company entered into an agreement to purchase from
Fifth Third Bank of Kentucky, Inc. approximately $400 thousand of consumer
loans, certain branch facilities and to assume approximately $40 million of
deposits related to Fifth Third's Bowling Green and Scottsville, Kentucky
branches. The acquisition is expected to be consummated during the first quarter
of 1995.
(4) Cash and Due from Banks
Regulatory authorities require the banks to maintain reserve balances on
customer deposits. The amounts of required reserves totaled approximately
$21,911,000 at December 31, 1994, and $18,972,000 at December 31, 1993.
(5) Securities
Effective December 31, 1993, the company adopted Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities. Accordingly, all debt securities in which the company does
not have the ability or management does not have the positive intent to hold to
maturity are classified as securities available for sale and are carried at
market value. All equity securities are classified as available for sale
beginning December 31, 1993. In conjunction with the adoption of Statement No.
115, $171.5 million of investment securities were transferred to securities
available for sale. Unrealized gains and losses on securities available for sale
are reported as a separate component of shareholders' equity (net of tax)
beginning December 31, 1993. Securities available for sale prior to December 31,
1993, were carried at the lower of aggregate cost or market value.
The following summarizes securities available for sale at December 31, 1994
and 1993.
Amortized Unrealized Market
December 31, 1994 (In Cost Gains Losses Value
thousands)
U.S. Treasury and federal $153,535 $- $7,051 $146,484
agency securities
Collateralized mortgage
obligations
and mortgage-backed 75,855 - 4,960 70,895
securities
Equity securities 12,689 27 452 12,264
Total securities available $242,079 $27 $12,463 $229,643
for sale
Amortized Unrealized Market
December 31, 1993 (In Cost Gains Losses Value
thousands)
U.S. Treasury and federal $123,023 $1,108 $454 $123,677
agency securities
Collateralized mortgage
obligations
and mortgage-backed 104,633 1,086 446 105,273
securities
Equity securities 11,205 42 161 11,086
Total securities available $238,861 $2,236 $1,061 $240,036
for sale
The amortized cost and approximate market values of securities held to maturity
as of December 31, 1994 and 1993, follows:
Amortized Unrealized Market
December 31, 1994 (In Cost Gains Losses Value
thousands)
U.S. Treasury and federal $3,081 $- $356 $2,725
agency securities
Collateralized mortgage
obligations
and mortgage-backed 26,372 - 954 25,418
securities
State and municipal 49,752 254 2,130 47,876
obligations
Corporate debt securities 5,553 - 363 5,190
Total securities held to $84,758 $254 $3,803 $81,209
maturity
Amortized Unrealized Market
December 31, 1993 (In Cost Gains Losses Value
thousands)
U.S. Treasury and federal $51,759 $565 $114 $52,210
agency securities
Collateralized mortgage
obligations
and mortgage-backed 45,660 1,122 75 46,707
securities
State and municipal 42,162 1,945 209 43,898
obligations
Corporate debt securities 6,031 104 19 6,116
Total securities held to $145,612 $3,736 $417 $148,931
maturity
Included in equity securities at December 31, 1994, are Federal Home Loan Bank
and Federal Reserve Bank stock of $5,617,000 and $1,533,000, respectively. At
December 31, 1993, these stock investments were $4,572,000 and $1,176,000,
respectively.
The amortized cost and approximate market value of debt securities at December
31, 1994, by contractual maturity, are shown below. Expected maturities may
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
Mortgage-backed obligations generally have contractual maturities in excess of
ten years, but shorter expected maturities as a result of prepayments.
Securities Held Securities
to Maturity Available for Sale
Amortized Market Amortized Market
In thousands Cost Value Cost Value
Due in one year or less $4,047 $4,076 $32,902 $32,510
Due after on year
through five years 16,361 15,940 80,181 77,492
Due after five years
through ten years 28,988 27,174 40,452 36,482
Due after ten years 8,990 8,601 - -
58,386 55,791 153,535 146,484
Collateralized mortgage
obligations
and mortgage-backed 26,372 25,418 75,855 70,895
securities
$84,758 $81,209 $229,390 $217,379
Securities with a carrying value of approximately $148,348,000 and $147,174,000
at December 31, 1994 and 1993, respectively, were pledged to secure public
funds, trust funds and for other purposes.
Gross gains of $257,000; $1,236,000; and $1,086,000; and gross losses of $-0-;
$87,000; and $196,000 were realized on sales of securities in 1994, 1993, and
1992, respectively.
(6) Loans
The company extends credit in the form of commercial loans, real estate loans
and consumer loans to customers primarily in the immediate market areas of its
subsidiaries. The composition of loans at December 31, 1994 and 1993 follows:
In thousands 1994 1993
Commercial $318,970 $320,952
Commercial real estate 334,567 234,308
Residential real estate 339,488 304,990
Consumer 153,754 150,202
Unearned income (3,063) (3,656)
Loans net of unearned income $1,143,716 $1,006,796
The principal balance of nonaccrual and restructured loans at December 31, 1994
and 1993 was $4,405,000 and $7,517,000, respectively. The interest that would
have been recorded if all those loans were in an accrual status in accordance
with their original terms was approximately $519,000 in 1994, $452,000 in 1993,
and $505,000 in 1992. The amount of interest income that was actually recorded
for those loans was approximately $81,000 in 1994, $37,000 in 1993, and $134,000
in 1992.
Loans to executive officers and directors and their associates, including loans
to affiliated companies for which these individuals are principal owners,
amounted to approximately $42,127,000 at December 31, 1994 and $26,750,000 at
December 31, 1993. During 1994, new loans of $49,389,000 were made and
repayments of $32,950,000 were received. Other changes include increases for
changes in executive officers and directors of $8,605,000 and decreases related
to participations sold of $9,667,000. These loans were made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for other customers. Included in the balance of loans to executive officers
and directors at December 31, 1994, is a loan to a director of a subsidiary bank
totaling $1.6 million which is considered to be a potential problem loan.
An analysis of the changes in the allowance for loan losses follows:
In thousands 1994 1993 1992
Balance at January 1 $12,505 $9,596 $7,700
Provision for loan losses 2,212 2,794 2,618
Balance of allowance for loan losses
of acquired subsidiaries - 2,433 1,016
Loans charged off (2,791) (3,446) (2,499)
Recoveries of loans previously charged off 603 1,128 761
Net charge-offs (2,188) (2,318) (1,738)
Balance at December 31 $12,529 $12,505 $9,596
During 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 114, Accounting by Creditors for Impairment
of a Loan ("SFAS 114"). This statement must be adopted on a prospective basis by
January 1, 1995. SFAS 114 requires that impaired loans be measured at the
present value of expected future cash flows, discounted at the loan's effective
interest rate, at the loan's observable market price, or at the fair value of
the collateral if the loan is collateral dependent. Management has determined
that the adoption of SFAS 114 in 1995 will not have a material adverse effect on
the company's consolidated financial statements.
(7) Premises and Equipment
A summary of premises and equipment at December 31, 1994 and 1993, follows:
In thousands 1994 1993
Land and improvements $5,827 $5,703
Buildings and improvements 30,561 31,591
Furniture and equipment 31,714 23,918
68,102 61,212
Less accumulated depreciation and amortization 31,662 27,819
Total premises and equipment $36,440 $33,393
<PAGE>
(8) Long-Term Debt and Other Short-Term Borrowings
Long-term debt consisted of the following at December 31, 1994 and 1993:
In thousands 1994 1993
7.25% Subordinated Notes; due September 15,
2003; interest payable quarterly $32,930 $33,000
Advance from the Federal Home Loan Bank;
due May 9, 1994; interest at 4.50%,
payable monthly - 10,000
Employee Stock Ownership Plan ("ESOP") note payable
to bank; due September 30, 2000; interest at the
lender's
base rate; principal and interest payable quarterly 3,223 3,106
Employee Stock Ownership Plan ("ESOP") note
payable to bank; due July 31, 1996; interest at
82.5% of the prime rate, principal and interest
payable quarterly 475 755
Secured note payable to bank; due May 1998;
interest at 6.7%, principal and interest payable
quarterly - 2,818
Unsecured note; due 1994; interest at 6-5/8%,
payable annually - 42
Debentures payable; due January 2000; interest
at the prime rate, payable quarterly - 3,790
Unsecured demand notes; interest at the
prime rate, payable quarterly 706 706
Total long-term debt $37,334 $54,217
Other short-term borrowings consisted of the following at December 31, 1994 and
1993:
In thousands 1994 1993
Advance from the Federal Home Loan Bank;
due January 20, 1994; interest at 3.45%,
payable monthly $- $15,000
Advance from the Federal Home Loan Bank;
due March 27,1995; interest at 6.45%,
payable monthly 15,000 -
Advance from the Federal Home Loan Bank;
due December 27, 1995; interest at 7.7%,
payable monthly 3,000 -
Advance from the Federal Home Loan Bank;
due January 13, 1995; interest at 5.6%,
payable monthly 20,000 -
Advance from the Federal Home Loan Bank;
due December 1, 1995; interest at 7.35%,
payable monthly 10,000 -
All other short-term borrowings 33 -
Total other short-term borrowings $48,033 $15,000
The prime interest rate and base rate associated with certain of the above
obligations was 8.5% at December 31, 1994, and 6.0% at December 31, 1993.
The company has a $3,000,000 unsecured operating line of credit with an
unaffiliated bank. This obligation has substantially the same restrictive
covenants as the ESOP loan due September 30, 2000, as described below. The line
was not in use at December 31, 1994 or 1993.
The advances from the Federal Home Loan Bank are collateralized by the
company's Federal Home Loan Bank stock and certain first mortgage loans in the
approximate amount of 150% of the debt.
The ESOP note payable due September 30, 2000, is guaranteed by the company. The
related loan agreement has a number of restrictive covenants, including
maintaining capital levels of the company and the banks at least at the minimum
levels required by applicable regulatory agencies; maintaining the company's
risk-weighted capital ratio, as defined, at not less than 9.25%; maintaining the
company's leverage ratio, as defined, at not less than 5.25%; maintaining the
company's annualized return on assets at the date of financial reports required
by regulations at no less than .50%; maintaining nonperforming loans, as
defined, at less than 2.50% of gross loans at the date of required financial
reports; and maintaining on a consolidated basis an allowance for loan losses of
at least .75% of gross loans. The ESOP note payable due July 31, 1996, is also
guaranteed by the company. The loan obligations of the ESOP are recorded on the
consolidated balance sheet with a corresponding amount recorded as a reduction
of the company's shareholders' equity. Both the loan obligation and the
reduction of shareholders' equity are reduced by the amount of any loan
repayments made by the ESOP. The company's Employee Stock Ownership Plan is
described in note 12 to the consolidated financial statements.
Principal payments required for the years 1994 through 1999 on long-term debt
at December 31, 1994, are as follows:
Year ended December 31 In
thousands
1995 $669
1996 578
1997 604
1998 672
1999 671
Later years 34,140
(9) Shareholders' Equity
Common Stock
The company has stock option plans which permit options to be granted for a
maximum of 857,888 shares of common stock of the company. Under the terms of the
plans, options with ten-year terms may be granted to certain key employees to
purchase common stock at not less than fair value of the common stock at the
date of grant. A summary of share data related to the option plan, adjusted for
stock splits, follows:
Number Option price
of shares per share
Options outstanding December 31, 1991 225,141 $4.55-$11.53
Granted 11,236 $6.13
Exercised (2,451) $8.44-$9.375
Terminated or canceled (19,671) -
Options outstanding December 31, 1992 214,255 $4.55-$11.53
Granted 79,673 $16.00
Exercised (8,577) $6.13-$8.16
Terminated or canceled (28,374) -
Options outstanding December 31, 1993 256,977 $4.55-$16.00
Granted 141,550 $15.25-$16.50
Exercised (18,018) $6.13-$11.53
Terminated or canceled (32,852) -
Options outstanding December 31, 1994 347,657 $4.55-$16.50
Of the options outstanding, 108,725 were exercisable as of December 31, 1994.
Preferred Stock and Rights Plan
During 1992, the company's Articles of Incorporation were amended to eliminate
two series of Class A Preferred Stock, designated the 1988 and 1990 Series, and
to authorize 5,000,000 shares of Class B Preferred Stock, Series 1992. Series
1992 Class B Preferred Stock is issuable in connection with the company's
Shareholder Rights Plan and carries the right to cumulative annual dividends of
$6.00 per share or 133 times dividends per common share (subject to adjustment),
whichever is greater.
FGC had authorized, issued and outstanding two classes of preferred stock,
Class A and Class B, which were redeemed on September 1, 1994. At December 31,
1993, there were no dividends in arrears on preferred stock.
On January 20, 1992, the company's Board of Directors adopted a Shareholder
Rights Plan. Under the plan, the Board declared a dividend of one right for each
outstanding share of common stock. In addition, the company will issue one right
with respect to each share of common stock issued subsequent to that date. Each
right, when and if it becomes exercisable, will entitle the registered holder to
purchase from the company 1/100 of a share of Series 1992 Preferred Stock,
subject to adjustment, at an exercise price of $45. The description and terms of
the rights are set forth in a Rights Agreement, dated as of January 20, 1992,
between the company and First Union National Bank, as Rights Agent. The Board
may redeem the rights in whole, but not in part, at a price of $.01 per right.
The rights become exercisable only if a person or group acquires, or obtains
the right to acquire, beneficial ownership of 15% or more of the company's
outstanding common stock, the Board determines that a beneficial owner of at
least 10% of the company's outstanding common stock has a detrimental effect on
the company or its shareholders, or a tender or exchange offer is commenced for
25% or more of the outstanding common stock.
After the rights become exercisable, if any person becomes the beneficial owner
of more than 15% of the outstanding common stock, or the Board determines that a
beneficial owner of at least 10% of the company's outstanding common stock has a
detrimental effect on the company or its shareholders, then the rights will
entitle each holder of a right to purchase, for the exercise price, the number
of shares of preferred stock which at the time of the transaction would have a
market value twice the exercise price.
(10) Dividend Restrictions
Payment of dividends by the company's subsidiaries is restricted by national
and state banking and thrift laws and regulations. Also, certain notes payable
described in note 8 include restrictive covenants related to the maintenance of
minimum capital ratios by the banks, which effectively restrict the payment of
dividends. At December 31, 1994, the aggregate retained earnings of the
company's subsidiaries was approximately $52.9 million, of which approximately
$19.7 million is available as of January 1, 1995, for the payment of dividends
under the most restrictive of the above restrictions.
Certain notes payable described in note 8 include restrictive covenants related
to the maintenance of minimum capital ratios, which effectively restrict the
payment of dividends by the company. Also, minimum regulatory capital
requirements effectively limit the payment of dividends. At December 31, 1994,
the most restrictive of the covenants limited the payment of dividends by the
company to approximately $27.8 million.
(11) Income Taxes
As discussed in note 1, the company adopted in 1993 Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes. The cumulative effect
of this change in accounting for income taxes, determined as of January 1, 1993,
was an increase in net income of $296,000 and is reported separately in the
consolidated statement of income for 1993. Financial statements for prior years
have not been restated to apply the provisions of Statement 109.
Total income tax expense (benefit) for the years ended December 31, 1994 and
1993 was allocated as follows:
In thousands 1994 1993
Income before income tax and
cumulative effect of change in
accounting principle $7,075 $6,223
Shareholders' equity, for unrealized net
gain (loss) on securities available for sale (4,818) 455
$2,257 $6,678
The components of income tax expense (benefit) were as follows:
In thousands 1994 1993 1992
Current $7,957 $6,745 $6,551
Deferred (882) (522) (152)
$7,075 $6,223 $6,399
An analysis of the differences between the effective tax rates and the
statutory U.S. federal income tax rate is as follows:
1994 1993 1992
U.S. federal income tax rate 35.0 % 35.0 % 34.0 %
Changes from the statutory rate:
Tax exempt investment income (5.1) (4.5) (4.0)
Amortization of goodwill 0.8 0.8 0.7
Acquisition costs 1.2 0.0 (0.1)
State income taxes, net of
federal tax benefit 1.2 1.0 1.1
Statutory bad debt deduction - - (0.6)
Surtax exemption - (0.5) -
Other, net (0.2) (0.6) 1.1
32.9 % 31.2 % 32.2 %
The sources of timing differences and the resulting deferred income tax expense
(benefit) for 1992 follows:
In thousands 1992
Loan loss provision in excess of
amount allowed for tax purposes $(308)
Tax gains on sales of loans (80)
Loan fees (101)
Other, net 337
$(152)
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1994 and
1993, are presented below:
In thousands 1994 1993
Deferred tax assets:
Allowance for loan losses $3,200 $2,410
Deferred compensation 293 301
Investment securities 4,480 -
Differences due to purchase accounting
adjustments related to the
following:
Accrued expenses 505 545
Mortgage servicing 167 179
Other 73 79
Total gross deferred tax assets 8,718 3,514
Less valuation allowance (108) (108)
Net deferred tax asset 8,610 3,406
Deferred tax liabilities:
Differences due to purchase accounting
adjustments related to the
following:
Investments and other assets 870 916
Premises and equipment 415 422
FHLB stock 449 449
Amortization of intangibles 58 99
Deferred loan fees 239 509
Depreciation 228 209
Investment securities - 279
FHLB stock 178 40
Other 21 31
Total deferred tax liabilities 2,458 2,954
Net deferred tax asset $6,152 $452
The valuation allowance for deferred tax assets as of January 1, 1993, was
$108,000. There was no change in the total valuation allowance for the years
ended December 31, 1994 and 1993. In assessing the realizability of deferred tax
assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment. Based upon the level of historical taxable income and
projections for future taxable income over the periods in which the deferred tax
assets are deductible, management believes it is more likely than not the
company will realize the benefits of these deductible differences, net of the
existing valuation allowance at December 31, 1994.
Shareholder's equity of Trans Financial Bank of Tennessee, F.S.B., and Trans
Financial Bank, Federal Savings Bank, at December 31, 1994, include $5,101,000
for which no deferred federal income tax liability has been recognized. This
amount represents an allocation of income to bad debt deductions for tax
purposes only. Reduction of amounts so allocated for purposes other than tax bad
debt losses or adjustments arising from carrying back net operating losses to
prior years may create income for tax purposes only, which would be subject to
the then current corporate income tax rate.
(12) Employee Benefit Plans
The company has an employee stock ownership plan ("ESOP") under which the
company and its subsidiaries will contribute to the ESOP an amount determined by
the respective Boards of Directors at their discretion. In November 1993
Statement of Position ("SOP") 93-6, Employers' Accounting for Employee Stock
Ownership Plans, was issued by the American Institute of Certified Public
Accountants. The SOP prescribes changes in the accounting for the company's ESOP
once all unallocated shares held by the ESOP on December 31, 1992, are
exhausted. Shares acquired after December 31, 1992, will be subject to the
accounting prescribed in the SOP. The changes include recognition of
compensation cost, accounting for dividends on allocated and unallocated shares
and the inclusion in earnings per share calculations of shares committed to be
released from the ESOP. As debt is repaid, shares are released from collateral
and allocated to active employees based on total debt service for the year. At
December 31, 1994, the ESOP owned 257,108 allocated and 304,236 unallocated
shares. The company recognized expenses related to the ESOP based on cash
contributions, with such amounts exceeding the amount computed under the shares
allocated method. The interest incurred on the ESOP note payable, the amount
contributed by the company to the ESOP, and the amount of dividends on ESOP
shares used for debt service by the ESOP for 1994, 1993, and 1992 were as
follows:
In thousands 1994 1993 1992
Interest incurred $263 $236 $100
Contributions 894 597 400
Dividends used for debt service 118 6 67
The company has a profit sharing plan qualified under Section 401(k) of the
Internal Revenue Code. Under the amended profit sharing plan, the company and
its subsidiaries will provide funds to match the contribution made by the
participating employee up to a maximum of 4% of the employee's salary. Contribu
tions in accordance with the profit sharing plan were approximately $509,000 in
1994, $360,000 in 1993, and $214,000 in 1992.
KCB was the sponsor of a profit-sharing plan qualified under Section 401(k) of
the Internal Revenue Code. Under the profit sharing plan, KCB provided funds to
match the contributions made by the participating employees up to a maximum of
6% of the employee's salary. Contributions in accordance with the profit-sharing
plan were approximately $9,000 in 1994, $31,000 in 1993, and $29,000 in 1992.
Former full-time employees of Kentucky State Bank who meet certain requirements
as to age and length of service are covered by a defined benefit pension plan.
Pension expense for this plan was $5,000 in 1994, $2,000 in 1993, and $14,000 in
1992. The plan's funded status at December 31, 1994, was composed of plan assets
of $453,000 and a projected benefit obligation of approximately $586,000.
Full-time employees of KCB who meet certain requirements as to age and length
of service are covered by a defined benefit pension plan. On May 31, 1993, KCB
froze the plan, thereby eliminating the accrual of benefits for participants
after that date. The consolidated financial statements for 1993 include the
recognition of the cost of curtailment of the plan for the freezing in 1993
($45,000) and recognition of prior unrecognized loss in anticipation of plan
termination ($309,000). Net pension expense for this plan was $-0- in 1994,
$367,000 in 1993, and $58,000 in 1992. The plan's funded status at December 31,
1994, was composed of plan assets of $1,088,000 and a projected benefit
obligation of approximately $1,343,000.
Former full-time employees of PFS who meet certain requirements as to age and
length of service are covered by a defined benefit pension plan. PFS was a
member of the Financial Institutions Retirement Fund, which is a nonprofit
pension trust through which the Federal Home Loan Bank, savings banks and
similar institutions may cooperate in providing for the retirement of their
employees. No contributions were required in 1994, 1993, or 1992.
The company has no significant commitments to pay post-retirement or post-
employment benefits other than as described above.
Stock options granted to key employees are described in note 9 to the
consolidated financial statements.
(13) Commitments and Contingent Liabilities
Off-Balance-Sheet Financial Instruments
The company's consolidated financial statements do not reflect various
commitments and contingent liabilities which arise in the normal course of
business to meet the financing needs of customers. These include commitments to
extend credit, standby letters of credit, and derivative financial instruments.
These instruments involve, to varying degrees, elements of credit, interest rate
and liquidity risk in excess of the amount recognized in the consolidated
balance sheet. The extent of the company's involvement in various commitments is
expressed by the contract amount of such instruments.
Commitments to extend credit, which amounted to $247,621,000 at December 31,
1994, and $201,634,000 at December 31, 1993, are agreements to lend to a
customer as long as all conditions established in the contract are fulfilled.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Market risk arises on fixed rate commitments
if interest rates have moved adversely subsequent to the extension of credit.
The company believes that market risk related to these commitments is not
significant. Since many of the commitments are expected to expire without being
drawn upon, the total commitments do not necessarily represent future cash
requirements. The company evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary upon
extension of credit, is based upon management's credit evaluation of the
customer. Collateral varies but may include accounts receivable, inventory,
property, plant, equipment, residential properties, income-producing commercial
properties, marketable securities and interest-bearing time deposits.
Standby letters of credit are conditional commitments issued by the company
guaranteeing the performance of a customer to a third party. Those guarantees
primarily consist of performance assurances made on behalf of customers who have
a contractual commitment to produce or deliver goods or services. Most
guarantees are for one year or less. The risk to the company arises from its
obligation to make payment in the event of the customer's contractual default
and is essentially the same as that involved in extending loan commitments to
customers. The amount of collateral obtained, if deemed necessary, is based upon
management's credit evaluation of the customer. Collateral held varies. The
company believes the market risk related to the standby letters of credit is not
significant. The company had standby letters of credit outstanding totaling
$35,759,000 and $33,776,000 at December 31, 1994 and 1993, respectively.
Commercial letters of credit are short-term commitments generally used to
finance a commercial contract for the shipment of goods from seller to buyer. At
December 31, 1994 and 1993, the company had $-0- and $4,861,000, respectively,
in commercial letters of credit outstanding.
Derivative financial instruments are financial instruments whose values and
characteristics are derived from those of other financial instruments. A
necessary component of the company's overall interest rate risk management
strategy is the use of off-balance-sheet derivatives. Utilizing off-balance-
sheet derivatives allows the company to manage earnings volatility and is a cost
and capital- efficient way to modify the repricing or maturity characteristics
of on-balance sheet assets and liabilities. Off-balance sheet derivative
transactions used for interest rate sensitivity management could include swaps,
futures and options with indices that directly relate to the pricing of specific
assets and liabilities of the company. The company believes there is minimal
risk that the derivatives used for rate sensitivity management will have any
significant unintended effect on the company's financial condition or results of
operations.
As of December 31, 1994, the company was in an asset sensitive position because
the repricing characteristics of the asset and liability portfolio were such
that an increase in interest rates would have a positive effect on earnings and
a decrease in interest rates would have a negative effect on earnings. To assist
in achieving a desired level of interest rate sensitivity the company, in 1994,
entered into a $20 million notional amount interest rate swap which effectively
converts certain certificates of deposit from fixed interest rates to floating
rates. The company pays a variable interest rate and receives a fixed rate of
4.38%. The variable rate at December 31, 1994 was 5.64%. This instrument expires
on May 3, 1996. Interest income and expense is accrued over the term of the
agreement. The related fair value of the off-balance sheet instrument (the
discounted present value of the difference between the current market rate and
the actual swap rate) was $(.9) million at December 31, 1994. The increased
contribution to net interest income in a higher interest rate environment from
on-balance sheet assets will substantially offset the negative impact on net
interest income of any interest payments made by the company in an increasing
rate environment.
Although off-balance sheet derivative instruments do not expose the company to
credit risk equal to the notional amount, the company is exposed to credit risk
equal to the fair value gain in an off-balance sheet derivative instrument if
the counterparty fails to perform. The company minimizes the credit risk in
these instruments by dealing only with high quality counterparties and each
transaction is specifically approved for applicable credit exposure. The credit
exposure of each outstanding off-balance sheet derivative instrument is either
collateralized with U.S. Government or agency securities or is with a
counterparty who has credit ratings of at least investment grade from one of the
major rating agencies. Further, the company's policy is to require all
transactions be governed by an International Swap Dealers Association Master
Agreement and be subject to bilateral collateral arrangements.
In addition, the company requires all off-balance sheet transactions be
employed solely with respect to asset/liability management or
transaction/inventory hedging purposes, not for general speculative trading
activity.
Other Off-Balance-Sheet Risks
With respect to mortgage loans sold to investors, such loans are generally sold
with servicing rights retained, with only the normal legal representations and
warranties regarding recourse to the company. Management believes that any
liabilities which may result from such recourse provisions are not significant.
Legal Proceedings
As of December 31, 1994, there were various pending legal actions and
proceedings against the company in which claims for damages are asserted.
Management, after discussion with legal counsel, believes that the ultimate
result of these legal actions and proceedings will not have a material adverse
effect upon the consolidated financial statements of the company.
(14) Fair Value of Financial Instruments
The estimated fair values of the company's financial instruments are as follows:
December 31, 1994 December 31, 1993
Carrying Fair Carrying Fair
In thousands Amount Value Amount Value
Financial assets:
Cash and short-term $81,025 $81,025 $101,758 $101,758
investments
Securities 314,401 310,852 385,648 388,967
Loans 1,137,728 1,126,713 1,039,469 1,050,353
Financial liabilities:
Deposits 1,335,509 1,328,893 1,376,227 1,382,549
Federal funds purchased
and repurchases 74,553 74,553 29,704 29,704
Long-term debt and
other short-term 85,367 82,613 69,217 69,142
borrowings
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash, Short-Term Investments, Federal Funds Purchased and Repurchases
For these short-term instruments, the financial statement carrying amount
approximates fair value.
Securities
The fair value of securities is based on quoted market prices or, if market
prices are not available, is estimated by discounting future cash flows using
current rates at which investments would be made in similar instruments with
similar credit ratings and equivalent remaining maturities.
Loans
The fair value of loans is estimated by discounting the future cash flows using
current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities.
Deposits
The fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable on demand at the reporting date. The fair value
of fixed-maturity certificates of deposit is estimated by discounting the future
cash flows using the rates currently offered for deposits of similar remaining
maturities.
Long-term Debt and Other Short-term Borrowings
Rates currently available to the company for debt with similar terms and
remaining maturities are used to estimate fair value of existing debt.
Off-Balance-Sheet Financial Instruments
The fair values of loan commitments and letters of credit are estimated using
the fees currently charged to enter into similar agreements, taking into account
the remaining terms of the agreements and the present creditworthiness of the
counterparties. The value of these financial instruments was not material at
December 31, 1994 and 1993.
Limitations on Fair Value Reporting
The fair value estimates are made at a discrete point in time based on relevant
market information and information about the financial instruments. Because no
market exists for a significant portion of the company's financial instruments,
fair value estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments, and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment and,
therefore, cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
The fair value estimates are based on financial instruments only. The company
has not attempted to estimate the value of assets and liabilities not considered
to be financial instruments, such as premises and equipment, the mortgage
banking operation and the intangible value of its core deposits and branch
system. Accordingly, the fair value estimates do not represent a fair value for
the company as a whole.
(15) Parent Company Financial Statements
Condensed financial data for Trans Financial Bancorp, Inc. (parent company only)
as of December 31, 1994 and 1993 and for the years ended December 31, 1994, 1993
and 1992 are as follows:
Condensed Balance Sheets
December 31 - In thousands 1994 1993
Assets
Cash on deposit with subsidiaries $2,507 $15,977
Investment in subsidiaries 143,303 137,507
Other investments 74 342
Other assets 4,346 3,522
Total assets $150,230 $157,348
Liabilities and Shareholders' Equity
Long-term debt and other notes payable $37,334 $44,191
Other liabilities 1,264 1,121
Shareholders' equity 111,632 112,036
Total liabilities and shareholders' equity $150,230 $157,348
Condensed Statements of Income
Years Ended December 31
In thousands 1994 1993 1992
Income
Dividends from subsidiaries $15,860 $12,675 $13,546
Other interest and dividends 285 146 34
Management fees from subsidiaries
and other income 3,732 4,620 4,359
Total income 19,877 17,441 17,939
Expenses
Interest on long-term debt
and other notes payable 2,657 1,400 883
Other expenses 10,071 8,478 6,362
Total expenses 12,728 9,878 7,245
Income before income tax benefit
and equity in undistributed
earnings of subsidiaries 7,149 7,563 10,694
Federal income tax benefit 2,621 1,661 774
Income before equity in undistributed
earnings of subsidiaries 9,770 9,224 11,468
Equity in undistributed earnings of 4,650 4,826 1,997
subsidiaries
Net income $14,420 $14,050 $13,465
Condensed Statements of Cash Flows
Years Ended December 31
In thousands 1994 1993 1992
Cash flows from operating activities:
Net income $14,420 $14,050 $13,465
Adjustments to reconcile net income to cash
provided by operating activities:
Amortization 932 526 663
Equity in undistributed earnings of (4,650) (4,826) (1,997)
subsidiaries
Gain on sales of investments - - (119)
Increase in other assets (986) (2,351) (508)
Increase (decrease) in other liabilities 143 (102) 51
Net cash provided by operating activities 9,859 7,297 11,555
Cash flows from investing activities:
Investments in and acquisitions of (10,440) (22,716) (23,077)
subsidiaries
Net decrease in interest-bearing
deposits with banks - - 500
Purchases of other investments - - -
Proceeds from maturities and sales
of other investments - - 1,946
Net cash used in investing activities (10,440) (22,716) (20,631)
Cash flows from financing activities:
Proceeds from issuance of long-term debt - 36,129 1,938
Repayment of long-term debt and other notes (6,694) (4,542) (4,716)
payable
Proceeds from issuance of common stock 654 1,770 17,727
Redemption of preferred stock (1,010) - (2,285)
Dividends paid (5,839) (4,083) (3,467)
Net cash provided by (used in) financing (12,889) 29,274 9,197
activities
Net increase (decrease) in cash and cash (13,470) 13,855 121
equivalents
Cash and cash equivalents at beginning of 15,977 2,122 2,001
year
Cash and cash equivalents at end of year $2,507 $15,977 $2,122
Supplemental information:
Cash paid for interest $2,710 $1,402 $971
Non-cash transactions (note 2) (8,629) 893 7,798
<PAGE>
Exhibits
Sequentially
Numbered Pages
4(a)Restated Articles of Incorporation of the registrant are
incorporated by reference to Exhibit 3 of the registrant's
report on Form 10-Q for the quarter ended March 31, 1992.
4(b)Restated Bylaws of the registrant are incorporated by
reference to Exhibit 4(b) of the registrant's report on
Form 10-K for the year ended December 31, 1993.
4(c)Rights Agreement dated January 20, 1992 between Manufacturers
Hanover Trust Company and Trans Financial Bancorp, Inc. is
incorporated by reference to Exhibit 1 to the registrant's
report on Form 8-K dated January 24, 1992.
4(d)Form of Indenture (including Form of Subordinated Note) dated
as of September 1, 1993, between the registrant and First
Tennessee Bank National Association as Trustee, relating
to the issuance of 7.25% Subordinated Notes due 2003, is
incorporated by reference to Exhibit 4 of Registration
Statement on Form S-2 of the registrant (File No. 33-67686).
10(a)Trans Financial Bancorp, Inc. 1987 Stock Option Plan is
incorporated by reference to Exhibit 4(a) of Registration
Statement on Form S-8 of the registrant (File No. 33-43046).*
10(b)Trans Financial Bancorp, Inc. 1990 Stock Option Plan is
incorporated by reference to Exhibit 10(d) of the registrant's
Report on Form 10-K for the year ended December 31, 1990.*
10(c)Trans Financial Bancorp, Inc. 1992 Stock Option Plan is
incorporated by reference to Exhibit 28 of the
registrant's Report on Form 10-Q for the quarter ended March
31, 1992.*
10(d)Trans Financial Bancorp, Inc. 1994 Stock Option Plan is
incorporated by reference to the registrant's
Proxy Statement dated March 18, 1994, for the April 25, 1994
Annual Meeting of Shareholders.*
10(e)Employment Agreement between Douglas M. Lester and Trans
Financial Bancorp, Inc. is incorporated by reference to
Exhibit 10(c) of the registrant's Report on Form
10-K for the year ended December 31, 1990.*
10(f)Employment Agreement between Harold T. Matthews and Trans
Financial Bank, National Association is incorporated by
reference to Exhibit 10(e) of the registrant's
Report on Form 10-K for the year ended December 31, 1992.*
Sequentially
Numbered Pages
10(g)Description of the registrant's Performance Incentive Plan .* 54
10(h)Form of Deferred Compensation Agreement between registrant and
certain officers of the registrant is incorporated by reference
to Exhibit 10(g) of the registrant's Report on Form 10-K for
the year ended December 31, 1992.*
10(i)Trans Financial Bancorp, Inc. Dividend Reinvestment and
Stock Purchase Plan is incorporated by reference to
Registration Statement on Form S-3 of the registrant
dated May 15, 1991 (File No. 33-40606).
10(j)Warrant dated as of February 13, 1992 between Morgan Keegan
& Company, Inc. and Trans Financial Bancorp, Inc.
incorporated by reference to Exhibit 10(m) of
Registration Statement on Form S-2 of the registrant (File
No. 33-45483).
10(k)Share Exchange Agreement dated March 25, 1993 between Trans
Financial Bancorp, Inc. and Trans Kentucky
Bancorp is incorporated by reference to Exhibit 1 of the
registrant's Report on Form 8-K dated April 8, 1993.
10(l)Loan Agreement dated as of July 6, 1993 between First
Tennessee Bank National Association and Trans Financial
Bancorp, Inc. is incorporated by reference to
Exhibit 10(p) to the Registration Statement on Form S-2 of
the registrant (File No. 33-67686).
10(m)Underwriting Agreement dated as of September 9, 1993 among
Morgan Keegan & Company, Inc., J.C. Bradford and Company,
and Trans Financial Bancorp, Inc. incorporated by reference
to Exhibit (1) to Registration Statement on
Form S-2 of the registrant (File No. 33-67686).
10(n)Subordinated Note dated as of September 16, 1993, by Trans
Financial Bancorp, Inc. is incorporated by
reference to Exhibit 1 to Registration Statement on Form S-2
of the registrant (File No. 33-67686).
10(o)Agreement and Plan of Reorganization dated November 9,
1993, as amended January 6, 1994, among Trans Financial
Bancorp, Inc., Trans Financial Acquisition
Corporation and Kentucky Community Bancorp, Inc. is
incorporated by reference to Exhibit 2 to the Registration
Statement on Form S-4 of the registrant (File No. 33-51575).
10(p)Agreement and Plan of Reorganization and Plan of Merger
dated December 27, 1993 between Trans Financial Bancorp,
Inc. and Peoples Financial Services, Inc. is
incorporated by reference to Exhibit 2 of the registrant's
Report on Form 8-K dated January 10, 1994.
Sequentially
Numbered Pages
10(q)Agreement and Plan of Reorganization and Plan of Merger
dated January 28, 1994 between Trans Financial
Bancorp, Inc. and FGC Holding Company is incorporated by
reference to Exhibit 2(a) and 2(b) of the registrant's
Report on Form 8-K dated February 18, 1994.
11 Statement of Computation of Per Share Earnings 55
21 List of Subsidiaries of the Registrant 56
23 Consent of Independent Auditors 57
*Denotes a management contract or compensatory plan or arrangement of the
registrant required to be filed as an exhibit pursuant to Item 601 (10) (iii)
of Regulation S-K.
Exhibit 11
Statement Regarding Computation of Per Share Earnings
Years ended December 31
In thousands, except per share data 1994 1993 1992
Primary earnings per common share: (1)
Average common shares outstanding 11,175 11,124 10,633
Common stock equivalents 83 121 -
Average shares and share equivalents 11,258 11,245 10,633
Income before cumulative effect of
change in accounting principle $14,420 $13,754 $13,465
Primary earnings per common share
before cumulative
effect of change in accounting
principle $1.28 $ 1.22 $ 1.27
Net income $14,420 $14,050 $13,465
Less preferred stock dividends (54) (81) (137)
Income available for common stock $14,366 $13,969 $13,328
Primary net income per share $1.28 $ 1.24 $ 1.25
Fully-diluted earnings per common share: (1)
Average common shares outstanding 11,175 11,124 10,633
Common stock equivalents 83 121 -
Average shares and share equivalents 11,258 11,245 10,633
Income before cumulative effect
of change in accounting principle $14,420 $13,754 $13,465
Fully-diluted earnings per common
share before
cumulative effect of change
in accounting principle $1.28 $ 1.22 $ 1.27
Net income $14,420 $14,050 $13,465
Less preferred stock dividends (54) (81) (137)
Income available for common stock $14,366 $13,969 $13,328
Fully-diluted net income per share $1.28 $ 1.24 $ 1.25
(1)All common share and per share data have been adjusted to reflect the 4-for-
3 stock split effected February 1, 1993.
Exhibit 21
List of Subsidiaries of the Registrant
Trans Financial Bank, National Association
Real Estate Holding Company
Trans Financial Mortgage Company
Trans Financial Investment Services, Inc.
Trans Financial Bank, Federal Savings Bank
Trans Financial Bank Service Corporation
Trans Financial Bank of Tennessee, F.S.B.
General Service Corporation
Trans Financial Bank Tennessee, National Association
Trans Kentucky Bancorp, Inc.
Trans Financial Bank of Pikeville, National Association
Trans Travel Agency, Inc.
Trans Financial Bank of Martin, National Association
Cracker Jack Aviation, Inc.
Exhibit 23
Consent of Independent Auditors
The Board of Directors
Trans Financial Bancorp, Inc.:
We consent to incorporation by reference in the Registration Statements No. 33-
40606, No. 33-60844 and No. 33-56761 on Forms S-3, and Registration Statements
No. 33-21517, No. 33-43046, No. 33-53960 and No. 33-72492 on Forms S-8 of Trans
Financial Bancorp, Inc. of our report dated January 16, 1995, relating to the
consolidated balance sheets of Trans Financial Bancorp, Inc. and subsidiaries as
of December 31, 1994 and 1993 and the related consolidated statements of income,
changes in shareholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1994, which report appears in the December
31, 1994 annual report on Form 10-K of Trans Financial Bancorp, Inc.
Our report refers to changes in the methods of accounting for income taxes and
certain investments in debt and equity securities in 1993.
/s/ KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
Louisville, Kentucky
March 24, 1995
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 80,828
<INT-BEARING-DEPOSITS> 197
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 229,643
<INVESTMENTS-CARRYING> 84,758
<INVESTMENTS-MARKET> 81,209
<LOANS> 1,150,257
<ALLOWANCE> 12,529
<TOTAL-ASSETS> 1,617,835
<DEPOSITS> 1,335,509
<SHORT-TERM> 122,586
<LIABILITIES-OTHER> 10,774
<LONG-TERM> 37,334
<COMMON> 21,006
0
0
<OTHER-SE> 90,626
<TOTAL-LIABILITIES-AND-EQUITY> 1,617,835
<INTEREST-LOAN> 94,020
<INTEREST-INVEST> 19,318
<INTEREST-OTHER> 644
<INTEREST-TOTAL> 113,982
<INTEREST-DEPOSIT> 41,724
<INTEREST-EXPENSE> 47,375
<INTEREST-INCOME-NET> 66,607
<LOAN-LOSSES> 2,212
<SECURITIES-GAINS> 257
<EXPENSE-OTHER> 60,070
<INCOME-PRETAX> 21,495
<INCOME-PRE-EXTRAORDINARY> 14,420
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,420
<EPS-PRIMARY> 1.28
<EPS-DILUTED> 1.28
<YIELD-ACTUAL> 4.57
<LOANS-NON> 4,375
<LOANS-PAST> 3,514
<LOANS-TROUBLED> 30
<LOANS-PROBLEM> 2,341
<ALLOWANCE-OPEN> 12,505
<CHARGE-OFFS> 2,791
<RECOVERIES> 603
<ALLOWANCE-CLOSE> 12,529
<ALLOWANCE-DOMESTIC> 12,529
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
